Friday 12 November 2010

The decline of the West

I just came back from Korea. Being away for a few days from the problems facing the Fed in the U.S. and the government in Portugal that have been occupying my mind had the virtue of giving me some perspective.
I already knew that the IMF had estimated a 4.5% growth in world output for next year: the highest in a couple of decades. But I just ran across the following graph from the IMF October economic outlook and it really stunned me. If a good image is worth a thousand words, this one is worth a thousand articles and books on the decline of the West (U.S., Europe and Japan) and the rise of the developing world.

I am writing a little more about this (in Portuguese) tomorrow in my column in jornal i.


  1. It could also be called "The catching-up of the 'Rest'".

  2. Highly symptomatic, but it is my understanding that developing economies will always naturally "shine" in the current context: first of all because of their statistically more significative progress margin and unfulfilled potential(in the limit, if an economy is almost inexistent, for the first few years of development - particularly with foreign aid, its GDP growth numbers will be ridiculous), and second because they magnetize foreign investment on a global level, particulary from countries in which the job market is extremely competitive and saturated.

    Probably an interesting inference to take from this would be that the fact the west has gone into crisis has allowed and indeed catalyzed the development of the rest of the world.

    It will be interesting to see, however, if this trend is maintained beyond these countries' economic maturation, when, for example, the labor forcefully gets more costful following the CPI. Will the southeast asian economies still carry these 10-20% growth numbers when that happens? - i personally don't even see it as healthy for an economy to grow at this rate, to me it looks as though it potentiates social unbalance above all, even if in a direction that depends on the political system adopted in the country (and we all know some political systems are better at camuflaging these differences).

    Another thing that is apparent to me is that it is conceptually a misleading statistic. The GDP itself presents a (very rough) description of the bulk of the economy. It would be far more interesting to look into the GDP average growth breakdown by social stratae, for each country, for example. It seems to me, unfortunately, that these GDP average growth figures, for some countries, are more an indicator on the average swiss savings account growth for a particular omnipotent leader and his acolytes than for the economy of the country itself. And while in Portugal, for example, this idea can still hold truth for a notable elite via the perverse side-effects of corporativism and political cumplicity, i trust much more the GDP indicator for a description on the financial potential of the whole portuguese people than, let's say, while looking at the democratic republic of congo.

    In sum, - and i believe this was actually what you meant to show primordially-, to me this image shows much more about the stagnation of the western world than about the real growth of the rest.

    That said, and regarding the west's downfall, a couple of fundamental questions are imposed:

    - Wasn't this inevitable, taking into consideration the economic opportunities these developing countries represent for expansive corporations headquartered in saturated and old economies with crippled labor classes and unexciting demographics?

    - Was it not predictable, that given our noble but somewhat utopic (very unfortunately) ideologies of economic equality and social balance (via democratic socialism), that there would be a upper population limit to which an economy would be able to sustain itself on a certain level, and that perhaps, that limit has been exceeded for the level "we" want to maintain now?

  3. I know this latter is a particular dangerous idea, but my interest on it is purely academical. I am naturally not in favour of population caps in any way (perhaps family planning yes) but i find it interesting the challenges we face regarding population growth, particularly concerning economy and social balance in the context of our current ideological beliefs, economic doctrines and financial systems/infrastructure. The point here is that a country cannot support itself if people continuously live above what is sustainable. Either there must less people, or a lower level of life, otherwise a cascade effect of consequences come on the medium/long-term, some of which we are witnessing now, and i mean this on a strictically economical level - no environmental considerations thrown in. In the limit, when this happens on a social democratic country, the economy shrinks because the country cannot sustain all the social systems for the whole population, and eventually either is bailed out by some "independent" financial organization or privatizes itself (save the redundancy). That is, in my view, the death sentence of a country's prosperity and why i think the USA is walking dead right now.

    In any way -and this is probably my bottom-line-, it seems to me counter-intuitive (at least given my layman's understanding of economics), that it is expected that, in the profoundly interdependent global economy we have been knitting, we could perpetually sustain major economical differences between geoeconomical regions. I know this would not be the idea (at least for most of human beings) but it was a direct consequence of the way we parasited african countries, for example. But would it not be predictable that, at a certain point, the west would be "pushed back" by the developing economies and these "pushed forward" by the west? It is to me (again a totally uneducated layman in the subject of economics) the natural geoeconomical extension of the law of offer and demand. And probably the western crisis only accelerated this natural process. And to be honest, if the crisis in the west means development in the rest of the world, i am happy for it, it is about time we shrink into more suitable consumption levels and not this egoistical and hypocritical overconsumption. In the end i just hope it really means development for the countries and not morbid enrichment for a few.

    Ultimately you are right, the western world is in decline, for which economy - and GDP average growth numbers in particular-, are both a symptom and cause. A symptom of the failure of our financial systems, unreconciliable social and economical beliefs and halting demographics. We need something new, from scratch but backward compatible with what we've got now, and i guess that's the tough part.

    Sorry for the invasion and if at times i look as though wanting to be a smart ass but the reason why i wrote this had to do with the exact opposite. I have these admittedly falacious notions and views on economy, maybe even populist at times. I thought it would be the right opportunity to just be corrected by someone with knowledge - my idea was not to dispute your post and i doubt you will take time to correct me, but anyway here is a kid's very basic opinion on the world economy.