Third World Lessons for First World Growth

TURNAROUND: Third World Lessons for First World Growth

By Peter Blair Henry is the Dean of New York University’s Stern School of Business and a former Professor of International Economics at Stanford University.

Times have changed. China now has the second-largest economy in the world. Mexico, following almost twenty years of economic stability, now boasts 1.9 million manufacturing jobs, thriving innovation centers, and a burgeoning high-tech industry. Between 2001 and 2011, Brazil lifted 20 million people out of poverty and into its growing middle class, and in the last quarter of the twentieth century Botswana’s gross domestic product per capita grew faster than that of any other country on the planet. The once-labeled “Third World” is edging its way into the “First World.” Add to these observations the recent debt and financial crises that have battered the United States and Europe, and it becomes clear that the future prosperity of the global economy depends as never before on sustained growth in emerging markets as well as on the stabilization of our own shaky ground. Interdependence is paramount. In the years ahead, everyone will win or everyone will lose, and the outcome hinges critically on whether advanced nations muster the humility required to absorb and embrace the Third World’s lessons for First World growth.
How did we arrive at this reversal of fortune? Not so long ago China seemed hopelessly mired in poverty, Mexico triggered the Third World Debt Crisis, and Brazil experienced one of the world’s highest rates of inflation. How did these countries, and many others like them, engineer such a stunning economic turnaround? The answer, in a word, is discipline. Just as an individual’s ability to delay gratification at a young age is a powerful predictor of future academic and professional achievement, discipline is also central to the long-run economic health of nations. The point sounds almost too obvious to state, but the definition of “discipline” that emerges from a historical analysis of the Third World’s remarkable transformation may take you by surprise.

In the current economic and political climate, pundits and policy-makers of all stripes erroneously equate discipline with possessing the courage to adopt extreme measures. In the fiscal debate raging across the United States and Europe, British prime minister David Cameron and German chancellor Angela Merkel assert that austerity now—massive deficit reduction—is the way to get advanced economies back on track, while Nobel Prize–winning economist Paul Krugman argues that governments need to maintain deficit spending until robust growth resumes. A government decision that slashes spending at the wrong time and sends a weak economy into a tailspin can be just as undisciplined as one that unleashes a wasteful spending spree in an overheated environment. Discipline does not call for crash diets or binge eating, but rather for healthy habits practiced consistently over a lifetime.
Discipline occasionally calls for extraordinary measures, but most of the time discretion is the better part of valor. Good economic pol-icy requires not so much the bravado to implement drastic change as the strength and wisdom to make reasonable trade-offs over the many years it takes to transform a country’s standard of living. Discipline in this context means self-control and a sustained commitment to the future, resisting the temptation to adopt policies that tilt entirely in one ideological direction or another and opting instead for the vigilant pursuit of a pragmatic middle road to prosperity.

Discipline also has a certain periodicity. Fluctuating across time and location, it is not an inherent trait forever present in some countries and permanently absent from others. Germany, a country that many people view as the epitome of self-control, printed radically large quantities of money during the 1920s, plunging the nation into record hyperinflation and economic chaos. More recently, the US government’s acrimonious disagreement over the federal debt ceiling and near-default on its financial obligations in the summer of 2011 displayed a level of reckless behavior that few people would previously have thought possible for Uncle Sam. Developed countries are no longer the paragons of restraint that they imagine them-selves to be.
As patterns of discipline change, we need to acknowledge the shifting landscape. Developing countries have made astonishing progress. No reasonable observer of Brazil during the 1970s and 1980s would have described the country’s economic policy as disciplined, and yet, since 1994, Brazil has made consistent strides in that direction under the successive governments of Presidents Cardoso, Lula, and Rousseff. The policy pendulum now swings in the direction of prudence, self-control, and sustained commitment to the long term. In the early 1970s, few people in the Chinese government understood the basic principles of a market economy. Forty years later, Chinese policymakers responded decisively to the global recession of 2008–2009 with accelerated investment in infrastructure. As a result, China not only maintained its astonishingly high rate of growth but also contributed more to the global recovery than any other nation. (Note: Since 1987 when Deng Xiaoping started his Gaige Gaifang (Reform and Opening), China has lifted 600 million people from poverty)

Some observers attribute the new attitude and attendant success of emerging countries to the free-market policy reforms prescribed by the US Treasury, the International Monetary Fund (IMF), and the World Bank, beginning in earnest in the 1980s. Others counter that the reform agenda, unleashed on the developing world during the Reagan presidency and carried forward by subsequent US administrations bred resentment through its heavy-handed implementation and did more harm than good. These critics of the economic reform and globalization agenda sometimes known as “the Washington Consensus,” insist that the emerging-market success stories of today occurred in spite of, not thanks to, the changes foisted upon developing countries by the Western power elite.
If discipline means a steadfast commitment to policies that tread a consistent and pragmatic path between ideological extremes, how should countries in search of prosperity navigate between the growth narrative of reform enthusiasts, on the one hand, and the strident skepticism of reform critics, on the other? Because advanced nations unilaterally pushed reforms in the past, I understand the tendency of books like Joseph Stiglitz’s Globalization and Its Discontents to frame the debate in stark terms and to portray rich countries as the villains of globalization and developing nations as victims. I also appreciate the passion with which Jeff Sachs (The End of Poverty), Bill Easterly (The White Man’s Burden), and Dambisa Moyo (Dead Aid) state their differing views on the effectiveness of aid. When the stakes are high, it is natural to find ourselves drawn to clear, unyielding positions, particularly those tinged with a moral argument of one kind or another. After all, we are talking about helping millions of people, some of whom live on less than a dollar a day, lift themselves out of an existence where food and water are very much in doubt and into a reasonable standard of living. Yet precisely because the stakes are so high—for everyone, in rich and poor nations alike—we need less polarization and more focus on facts so that we may reliably answer the following question: which policy reforms, implemented under what circumstances, actually increase economic efficiency and help countries make the most of their limited resources?

The Economic Collapse of the Soviet Union.

But there were more immediate causes for the collapse. In the middle 1980's about seventy percent of the industrial output of the Soviet Union was going to the military. Oleg Gordievsky, a KGB official who defected to Britain, asserted that at least one third of the total output was going to the military. British intelligence could not believe such a high figure but later Western intelligence sources estimated that it was at least fifty percent. One can only imagine what a severe shortages of industrial goods there were for the rest of the economy.

In the U.S. the Reagan Administration increased the budget for the military and presented the possibility that it would implement a Star Wars antiballistic missile system. To maintain a parity with the U.S. under those developments would have required an even larger share of industrial ouput going to the military. The planners and decision-makers had to face the fact that it was economically impossible for the Soviet Union to increase the share of its output going to the military. The Soviet authorities then ended the arms race and called off the Cold War. When the justification of an external threat was removed there was no reason for the Russian public to tolerate the totalitarian regime and the political system fell apart.

China will not copy Western political systems

BEIJING - The newly-elected leader of the Chinese People's Political Consultative Conference (CPPCC) pledged Tuesday that China will not copy Western political systems under any circumstances.
"We need to steadfastly uphold the leadership of the Communist Party of China (CPC), adhere to and improve the system of multiparty cooperation and political consultation under the leadership of the CPC," said Yu Zhengsheng, chairman of the 12th National Committee of the CPPCC, the country's top political advisory body.
"We need to more strictly follow the socialist path of political development with Chinese characteristics, not imitate Western political systems under any circumstances, always adhere to the correct political orientation, and strengthen the CPPCC's ideological and political foundations of collective struggle," Yu told more than 2,000 political advisors at the closing meeting of the first session of the 12th CPPCC National Committee.
Yu, born in April 1945, was elected to the new post on Monday. He is also member of the Standing Committee of the Political Bureau of the CPC Central Committee.

Yu said that thoroughly implementing and studying the guiding principles of the 18th CPC National Congress held in November is the foremost political task of the CPPCC at present and for some time to come.
"The most important and core issues while implementing and studying these guiding principles are upholding and developing socialism with Chinese characteristics, strengthening confidence, being more conscientious, and achieving self-improvement," he said.
Yu also called on the political advisors to constantly deepen their understanding of the path, system of theories and system of socialism with Chinese characteristics.
"We must doggedly focus on the central task of economic development and serving the overall interests of the country, consciously plan and make arrangements for the work of the CPPCC in the context of the overall work of the Party and country, focus on carrying out investigations, studies, inspections and consultations on major state affairs with a bearing on the overall situation," he said.
He said the CPPCC will make more efforts to "adopt pragmatic measures and achieve practical results, advance development in a scientific way, promote social harmony, ensure all the CPPCC's efforts to fulfill its duties are compatible with the central task of economic development, conform to policy-making requirements more fully, and better reflect the people's wishes."

Western system unfit for China

"China must be doing something right. Before 1978 it was a basket case. Today China has the world's largest foreign reserves, (including hold $1.2 trillion of US debts), it is the world's biggest exporter of economic goods, world's biggest steel production (bigger than the US, EU and Japan combined), has one of the fastest super-computers in the world, high speed super-trains and world's longest railway lines, a modern space program with Taikonauts in space and space crafts orbiting the Moon, the world's deepest diving craft, more billionaires than in Texas and China lifted over 900 million people from abject poverty. And the best is yet to come.
To change to an adversarial Western system will ruin China as it is ruining the EU,the UK and the US, which are all going bankrupt.
The most important thing to remember is that China must never dream of creating a world empire and China must be governed by the rule of law and have a national policy of a peaceful rise. If China can do all that it will have an economy that will be the largest in the Galaxy by the period from 2021 to 2030 onwards."

Western models not panacea

Each human being is different from any other, having a mix of strengths and weaknesses that are unique. In the same way, societies differ from each other, having evolved out of different historical circumstances.
For example, in the 19th century, the British Empire was a source of pride in the United Kingdom, being a small island that took control of more than half the planet and converted its resources to its advantage. India's view on the same empire is different, for it saw its share in the global economy fall from 24 percent to less than 1 percent from 1820, when the British began to establish themselves in India, to 1947, the year they left.
Similarly, the Opium Wars were a source of immense profit for UK merchants, helping huge conglomerates dominate business in Asia and elsewhere. However, for the Chinese people, the Opium Wars were a source of immense pain and the cause of social disintegration that was only reversed in 1949, when the Communist Party of China founded New China.

The reality is that the European experience of colonialism has almost always been a zero-sum game, in which the other side lost heavily in order to ensure gains for the colonizing power. Which is why it is not reasonable for the West to demand that the rest of the world accept its version of history and economic and political doctrines. The circumstances in each non-Western country are very different from those in the West, which is why imposing a Western model would result in a less than optimal outcome.
If China has made such great progress, especially since the 1980s, it is because the CPC rejected copying Western commercial institutions, creating instead a model that had a natural fit with Chinese experience and needs. Strangely, while admitting that the Chinese economic model has worked in China, where a purely Western version may have failed, some Western powers constantly criticize China for not adopting a fully Western model of democracy.
Western powers ensured their dominance in the two previous centuries by control of territory. These days, they seek the same outcome by seeking to make other societies believe that following the advice given by them is the best course.
In South America in the 1970s, much misery was caused precisely because governments there strictly followed the orders of the World Bank and the International Monetary Fund, both of which were, and still are, dominated by the West, with only a United States or an European Union national heading these so-called international organizations.
Indeed, to the West, international means the West. The so-called international relations programs taught in the West, which are unfortunately so popular with affluent students in China and India, teach subjects solely through the prism of Western interests. Those passing out of such programs subconsciously begin to act and think in ways that promote Western interests, rather than that of their own countries. This is hardly surprising.

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