The Great Divergence manifested itself in various ways. In 1500 the world’s ten biggest cities had nearly all been in the East, with Beijing by far the biggest (more than ten times the size of wretched little London). In 1900 the biggest cities were nearly all in the West, with London more than four times the size of Tokyo, Asia’s largest conurbation. Divergence had a geopolitical dimension, too. In 1500, as we have seen, the ten European kingdoms that would become the modern era’s global empires accounted for a tenth of the world’s territory, 16 per cent of its population and a little more than two-fifths of its output. By 1913 these same states, plus the United States, controlled 58 per cent of the world’s land surface, 57 per cent of its population and 79 per cent of global GDP – of which only 18 per cent went to their colonial possessions. The world by this time was characterized by a yawning gap between the West and the Rest, which manifested itself in assumptions of white racial superiority and numerous formal and informal impediments to non-white advancement. This was the ultimate global imbalance.
I began this book with Rasselas’s question: ‘By what means … are the Europeans thus powerful? or why, since they can so easily visit Asia and Africa for trade or conquest, cannot the Asiaticks and Africans invade their coasts, plant colonies in their ports, and give laws to their natural princes?’ Imlac’s answer was that knowledge was power, but why European knowledge was superior to everyone else’s he had no idea. Now it is possible to give Rasselas a better answer. Why did the West dominate the Rest and not vice versa? I have argued that it was because the West developed six killer applications that the Rest lacked. These were:
1. Competition, in that Europe itself was politically fragmented and that within each monarchy or republic there were multiple competing corporate entities
2. The Scientific Revolution, in that all the major seventeenth-century breakthroughs in mathematics, astronomy, physics, chemistry and biology happened in Western Europe
3. The rule of law and representative government, in that an optimal system of social and political order emerged in the English-speaking world, based on private property rights and the representation of property-owners in elected legislatures
4. Modern medicine, in that nearly all the major nineteenth- and twentieth-century breakthroughs in healthcare, including the control of tropical diseases, were made by Western Europeans and North Americans
5. The consumer society, in that the Industrial Revolution took place where there was both a supply of productivity-enhancing technologies and a demand for more, better and cheaper goods, beginning with cotton garments
6. The work ethic, in that Westerners were the first people in the world to combine more extensive and intensive labour with higher savings rates, permitting sustained capital accumulation.
Those six killer apps were the key to Western ascendancy. The story of our time, which can in fact be traced back to the reign of the Meiji Emperor in Japan (1867–1912), is that the Rest finally began to download them. It was far from a smooth process. The Japanese had no idea what elements of Western culture and institutions were the crucial ones, so they ended up copying everything, from Western clothes and hairstyles to the European practice of colonizing foreign peoples. Unfortunately, they took up empire-building at precisely the moment when the costs of imperialism began to exceed the benefits. Other Asian powers – notably India – wasted decades on the erroneous premise that the socialist institutions pioneered in the Soviet Union were superior to the market-based institutions of the United States. However, beginning in the 1950s, a growing band of East Asian countries followed Japan in mimicking the West’s industrial model, beginning with textiles and steel and moving up the value chain from there. The downloading of Western applications was now more selective. Internal competition and representative government were less important features of Asian development; science, medicine, the consumer society and the work ethic (less Protestant than Max Weber had thought) were all more important. Today Singapore is ranked third by the World Economic Forum in its most recent competitiveness league table (meaning competitiveness with other countries). Hong Kong is eleventh, followed by Taiwan (thirteenth), South Korea (twenty-second) and China (twenty-seventh).19 This is roughly the order in which these countries Westernized their economies.
Patents Granted by Country of Origin of Applicant, 1995–2008
Today per-capita GDP in China is 19 per cent that of the United States, compared with 4 per cent when economic reform began just over thirty years ago. Hong Kong, Japan and Singapore were already there as early as 1950, Taiwan got there in 1970 and South Korea got there in 1975. According to the Conference Board, Singapore’s per-capita GDP is currently 21 per cent higher than that of the US, Hong Kong’s is about the same, Japan’s and Taiwan’s are about 25 per cent lower and South Korea’s 36 per cent lower.20 It would be a brave man who bet against China following the same trajectory in the decades ahead. China’s is the biggest and fastest of all the industrial revolutions. In the space of twenty-six years, its GDP grew by a factor of ten. It took the UK seventy years after 1830 to grow by a factor of four. According to the International Monetary Fund, China’s share of global GDP (measured in current prices) will pass the 10 per cent mark in 2013. Before the financial crisis, economists at Goldman Sachs forecast that China would overtake the United States in terms of GDP in 2027.21 But the financial crisis reduced US growth more than Chinese. If present rates persist, China’s economy could surpass America’s in 2014 in terms of domestic purchasing power and by 2020 in current dollar terms.22 Indeed, in some ways the Asian century has already arrived. China is on the brink of surpassing the American share of global manufacturing, having overtaken Germany and Japan since the new century began. China’s biggest city, Shanghai, is already far larger than any American city and sits atop a new league table of non-Western megacities. In sheer numbers, of course, Asia has long been the world’s most populous region. But the rapid growth of Africa’s population makes the decline of the West a near certainty. In 1950 the West as defined by Samuel Huntington – Western Europe, North America and Australasia – accounted for 20 per cent of the world’s population. By 2050, according to the United Nations, the figure will be 10 per cent.23 Huntington’s own data point to Western decline in a number of different dimensions: language (Western share down by 3 percentage points between 1958 and 1992); religion (down by just under 1 percentage point between 1970 and 2000); territory controlled (down fractionally between 1971 and 1993); population (down by 3 percentage points since 1971); gross domestic product (down by more than 4 percentage points between 1970 and 1992);* and military manpower (down by nearly 6 percentage points between 1970 and 1991). In most cases, the relative decline is much more marked if measured from 1913 or 1938.24
The financial crisis that began in the summer of 2007 should therefore be understood as an accelerator of an already well-established trend of relative Western decline. This was very nearly a Great Depression. The reasons it has been just a Slight Depression are threefold. First, China’s huge expansion of bank lending, which mitigated the effect of slumping exports to the West. Second, the massive expansion of the US monetary base implemented by Federal Reserve Chairman Ben Bernanke. Third, the immense fiscal deficits run by nearly all developed countries, with the United States out in front with deficits in excess of 9 per cent of GDP in two consecutive years. These policies – the diametric opposite of what was done in the early 1930s – pulled the world economy out of a tailspin from June 2009 onwards. But now the developed world is in the hangover phase that follows all forms of excessive stimulus. For various reasons, the fiscal policies of three Eurozone countries, Greece, Ireland and Portugal, have lost credibility in the eyes of bond investors, driving up their borrowing costs and deepening their fiscal difficulties. Looking at the long-term trend of public debt in these countries, as the Bank for International Settlements did in early 2010, one can see why.25 The financial crisis came on top of an already serious structural problem of
debt accumulation. Yet the same could be said for both the United Kingdom and the United States. And, at the time of writing, only the former has taken any steps to address the problem.
It is important to remember that most cases of civilizational collapse are associated with fiscal crises as well as wars. All the examples of collapse discussed above were preceded by sharp imbalances between revenues and expenditures, as well as by difficulties with financing public debt. Think of Spain in the sixteenth century: already by 1543 nearly two-thirds of ordinary revenue was going on interest on the juros, the loans by which the Habsburg monarchy financed itself. As early as 1559 total interest payments on the juros exceeded ordinary Spanish revenue; and the situation was little better in 1584 when 84 per cent of ordinary revenue went on interest. By 1598 the proportion was back to 100 per cent. Or think of France in the eighteenth century: between 1751 and 1788, the eve of Revolution, interest and amortization payments rose from just over a quarter of tax revenue to 62 per cent. Then there is the case of Ottoman Turkey in the nineteenth century: debt service rose from 17 per cent of revenue in 1868 to 32 per cent in 1871 to 50 per cent in 1877, two years after the enormous default which ushered in the disintegration of the Ottoman Empire in the Balkans. Finally, consider the case of Britain in the twentieth century. By the mid-1920s, debt charges were absorbing 44 per cent of total government expenditure, exceeding defence expenditure every year until 1937, when rearmament finally got under way in earnest. But note that Britain’s real problems came after 1945, when a substantial proportion of its now immense debt burden was in foreign hands. Of the £21 billion national debt at the end of the war, around £3.4 billion was owed to foreign creditors – equivalent to around a third of GDP.26
From 2001, in the space of just ten years, the US federal debt in public hands doubled as a share of GDP from 32 per cent to a projected 66 per cent in 2011. According to the Congressional Budget Office’s 2010 projections (using the ‘Alternative Fiscal Scenario’, which the CBO regards as more politically likely than its ‘Extended Baseline Scenario’), the debt could rise above 90 per cent of GDP by 2021 and could reach 150 per cent by 2031 and 300 per cent by 2047.27 Note that these figures do not take account of the estimated $100 trillion of unfunded liabilities of the Medicare and Social Security systems. Nor do they include the rapidly growing deficits of the states, nor the burgeoning liabilities of public employees’ pension schemes. On this basis, the fiscal position of the United States in 2009 was worse than that of Greece. With a debt-to-revenue ratio of 312 per cent, Greece was manifestly in dire straits. According to calculations by Morgan Stanley, however, the debt-to-revenue ratio of the United States was 358 per cent.28
These numbers are bad, but in the realm of financial stability the role of perception is in many ways more important. For now, the world still expects the United States to muddle through, eventually doing the right thing when, in a phrase commonly attributed to Churchill, all other possibilities have been exhausted. Past alarms about the deficit in the 1980s were overblown; by the late 1990s the federal government was running surpluses. So why worry? Such complacency can persist for a surprisingly long time – long after the statistical indicators have started flashing red. But one day, a seemingly random piece of bad news – perhaps a negative report by a rating agency – will make the headlines during an otherwise quiet news cycle. Suddenly, it will be not just a few specialists who worry about the sustainability of US fiscal policy but also the public at large, not to mention investors abroad. It is this shift that is crucial, for a complex adaptive system is in big trouble when a critical mass of its constituents loses faith in its viability. Beginning in the summer of 2007, the complex system of the global economy flipped from boom to bust because investors’ expectations about the probability of subprime defaults suddenly changed, blowing huge holes in the business models of thousands of highly leveraged financial institutions. The next phase of the current crisis may begin when the same investors reassess the creditworthiness of the US government itself. Neither interest rates at zero nor fiscal stimulus can achieve a sustainable recovery if people in the United States and abroad collectively decide that such measures will lead to much higher inflation rates or outright default. As the economist Thomas Sargent demonstrated two decades ago, such decisions are self-fulfilling, because it is not the supply of base money that determines inflation but the velocity of its circulation, which in turn is a function of expectations.29 In the same way, it is not the debt-to-GDP ratio that determines government solvency but the interest rate that investors demand. Bond yields can shoot up if expectations change about future government solvency or currency stability, intensifying an already bad fiscal crisis by driving up the cost of interest payments on new debt. The result is a kind of death spiral of falling confidence, rising yields and rising deficits. This is precisely what happened to Greece, Ireland and Portugal in 2010.
It is of course true that Japan has been able to increase its public debt to even higher levels relative to GDP without triggering such a crisis of confidence. However, nearly all the Japanese debt is in the hands of Japanese investors and institutions, whereas half the US federal debt in public hands is in the hands of foreign creditors, of which just over a fifth is held by the monetary authorities of the People’s Republic of China. Only the American ‘exorbitant privilege’ of being able to print the world’s premier reserve currency gives the US breathing space.30 Yet this very privilege is under mounting attack from the Chinese government. ‘Because the United States’ issuance of dollars is out of control and international commodity prices are continuing to rise,’ declared the Chinese Commerce Minister Chen Deming in October 2010, ‘China is being attacked by imported inflation.’31 The United States is engaged in ‘uncontrolled’ and ‘irresponsible’ money printing, according to Xia Bin, an economic adviser to the People’s Bank of China: ‘As long as the world exercises no restraint in issuing global currencies such as the dollar … then the occurrence of another crisis is inevitable.’32 Quantitative easing (purchases of Treasury securities by the Federal Reserve) was a form of ‘financial protectionism’, declared Su Jingxiang, a researcher with the China Institute of Contemporary International Relations.33 In November 2010 the Dagong credit rating agency downgraded the US to A+ from AA, with a negative outlook.
Chinese anxieties are understandable. The prices of all but a few commodities have surged upward since the trough of the crisis.* Nor is it surprising that China’s official holdings of US Treasuries were apparently reduced by around 10 per cent between July 2009 and June 2010.34 Even with the price of an ounce of gold at an unprecedented $1,400, the Chinese began to buy it in 2010 as a time-honoured hedge against inflation. Yet the United States fears not inflation but deflation. Prices are rising at the lowest rate since the 1950s, when the consumer price index was created. Despite the Federal Reserve’s best efforts, broad money is contracting and credit stubbornly refuses to grow. Even if nominal ten-year bond yields stay low, that means real long-term interest rates are likely to stay positive in the foreseeable future, which means no easy inflationary exit from the colossal debt burden weighing down on households, banks and government alike, of the sort that was achieved by many countries in the 1920s and the 1970s. Growth will stay sluggish, which also means that the federal government will continue to run deficits, albeit smaller ones. And that means a rising interest bill. According to the Congressional Budget Office’s alternative fiscal scenario, interest payments on the federal debt will rise from 9 per cent of federal tax revenues to 20 per cent in 2020, to 36 per cent in 2030 and to 58 per cent in 2040.35
Figures like these imply, among other things, a rapid reduction in American military commitments overseas. The CBO is already projecting the savings that would be made if the number of troops deployed overseas were slashed to 30,000 by 2013.36 This is exactly what we would expect to see as interest payments outstrip military expenditure as a share of federal revenue, which they soon will.
Does t
he shift of the world’s centre of gravity from West to East imply future conflict? In a seminal essay, Samuel Huntington predicted that the twenty-first century would be marked by a ‘clash of civilizations’, in which the West would be confronted by a ‘Sinic’ East and a Muslim Greater Middle East, and perhaps also the Orthodox civilization of the former Russian Empire.37 ‘The principal conflicts of global politics’, he wrote, ‘will occur between nations and groups of different civilizations. The clash of civilizations will dominate global politics. The fault lines between civilizations will be the battle lines of the future.’38 Numerous objections were raised to this prediction in the wake of its publication.39 It nevertheless seems a better description of the post-Cold War world than the competing theories Huntington discarded: that there would be a post-historical (or neo-conservative) ‘one world’ under American leadership, or a realist free-for-all between nearly 200 nation-states, or just downright ‘apolarity’, otherwise known as chaos.
Yet there is one major defect in Huntington’s model. As a prophecy it has failed – thus far – to come true. Huntington claimed that ‘conflicts between groups in different civilizations will be more frequent, more sustained and more violent than conflicts between groups in the same civilization.’ This has not been the case. There has been no increase in inter-civilizational war since the end of the Cold War. Nor do wars between members of different civilizations appear to last longer than other conflicts.40 Most wars in the past two decades have been civil wars, but only a minority of them have conformed to Huntington’s model. More often than not, the wars of the New World Disorder have been fought between ethnic groups within one of Huntington’s civilizations. To be precise: of thirty major armed conflicts that were either still going on or had recently ended in 2005 – twelve years after the publication of Huntington’s original essay – only nine could be regarded as being in any sense between civilizations, in the sense that one side was predominantly Muslim and the other non-Muslim. Nineteen were essentially ethnic conflicts, the worst being the wars that continue to bedevil Central Africa, closely followed by the wars in the Greater Middle East, where the vast majority of victims have been Muslims killed by other Muslims.41 Furthermore, many of those conflicts that have a religious dimension are also ethnic conflicts; religious affiliation often has more to do with the localized success of missionaries in the relatively recent past than with long-standing membership of a Christian or Muslim civilization. The future therefore looks more likely to bring multiple local wars – most of them ethnic conflicts in Africa, South Asia and the Middle East – than a global collision of civilizations. Indeed, these centrifugal tendencies may end up tearing apart the very civilizations identified by Huntington. In short, for ‘the clash of civilizations’, read ‘the crash of civilizations’.
Civilization: The West and the Rest Page 38
