Magazine | May 14, 2018, Issue

Growth in the 21st Century

Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth -- and How to Fix It, by Dambisa Moyo (Hachette, 320 pp., $30)

I have a soft spot for intellectual bomb-throwers and policy provocateurs. Perhaps it is because of my many decades working in financial markets: Some of the most successful hedge-fund traders I have worked with fixate on what they perceive to be flaws in conventional thinking. They zig when most of the market zags.

Dambisa Moyo, the Harvard-Oxford-trained, Zambian-born international economist and former Goldman Sachs adviser, is a policy entrepreneur who shows a similar taste for risk-taking. Very few in the international system were aware of her until 2009. She burst onto the scene with her audaciousand correctindictment of the system of global aid in a book titled “Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa.”

Moyo lucked out. Microsoft co-founder Bill Gates (himself once a master at upsetting the established order), when asked about the book, responded that Moyo “didn’t know much about aid and what it was doing in Africa.” Instead of expressing some intellectual curiosity, he launched a series of ad hominem attacks. He ended not with a counterargument but with an expression of moral outrage: “Books like that are promoting evil.” Bingo! Dambisa Moyo had herself a chair at the table of the ongoing global policy debate.

Now Moyo is taking on the relationship between democracy and economic growth. In her new book, she argues that growth, if it delivers rising living standards, “is the key to a stable, successful society.” She adds: “Growth matters — powerfully — to ordinary people.” Creating and maintaining growth “is the defining challenge of our time.” When it is strong, growth “sets in motion a virtuous cycle of economic opportunity, upward mobility, and rising standards of living.”

It might seem odd that after the last decade of subpar global economic growth, anyone would feel the need to make the case that growth is a good thing. But we live in strange, partisan, uber-ideological times. A prominent economist at an important economics-oriented Washington, D.C., think tank recently sent me an email. In an earlier book, I had laid out a series of bipartisan reforms for more-vigorous economic growth. He wrote: “Dave, I agree with most of your proposals, but higher growth rates don’t matter anymoreexcept for the top one percent who control all the wealth. So why bother?”

Moyo’s book serves a useful purpose by proclaiming the truth that a world of persistent mediocre growth rates that fail to “lift all the boats” will be a terrifying place of massive middle-class social unrest. Perhaps most important, she explores the role of democracy in stimulating and impeding growth, and she does so at a time when nondemocratic regimes such as China’s have achieved stunning levels of economic advancement even as they have continued to be repressive.

Moyo makes clear that democratic capitalism is in retreat and that liberal democracies cannot deliver strong growth “without substantial reform.” She calls for an “aggressive retooling [of] history’s greatest engine for growth, democratic capitalism itself.” Her most provocative argument is that not only China but countries such as Chile, Singapore, and Taiwan “have made it abundantly clear that democracy is not a prerequisite for economic success.” She adds: “Overwhelming evidence shows that economic growth is a prerequisite for democracy, not the other way around. . . . The startling success of politically stable but non-free nations like China . . . suggest[s] that freedom of markets and citizens alone is not sufficient.”

Moyo argues that China’s economic success is “largely attributable to its political system,” which has been “capable of defending and enforcing property rights.” The bottom line is that China “masterfully executed a carefully choreographed plan for achieving long-term growth” not with the Western values of free markets and democracy, but by creating “policy predictability and institutions that preserve and defend property rights.” (Of course, whether China’s growth is sustainable is yet to be determined.)

She writes that “the world is heading in a direction of greater government control and intervention,” as developing-world leaders are discovering that “there are other political and economic policy routes to establishing a middle class,” which she views as a precursor both to democracy and to “a market economic system that lasts.” In short, the world is “shifting from pursuing the ideals of freedom to grappling with the reality of earning a living.”

The reason for this newly discovered developing-world skepticism, Moyo points out, is that democratic political systems, particularly that in the United States, are plagued with the disease of “short-termism” and a general “myopia” in both business and politics. Moyo argues that the “poor design of the U.S. government” worsens the kind of short-termism that already afflicts the economy, and makes the problems related to infrastructure and unfunded retirement-support systems harder to solve: “One of democracy’s greatest weaknesses is the inability to reform itself.”

The author’s proposals for reform are provocative, but some of them might place a tad too much faith in the establishment elite’s capabilities. Moyo proposes to pay lawmakers salaries more competitive with those of leaders in the private sector and to offer bonuses if GDP growth hits certain levels. At the same time, lawmakers must accept term limits and agree to campaign-finance reform. Nothing wrong with that; but in her reformed democratic system of “mandatory voting,” voters would be required to demonstrate “a minimum set of standards,” and the votes of those deemed “highly qualified” would count more than those of their neighbors who are deemed to be in the “unqualified” or “standard qualified” voting tiers. That will sound to too many Americans like a prescription for Nineteen Eighty-Four.

Despite an absurd recommendation or two, Edge of Chaos represents an important warning that America’s global clout and the global order itself are “under threat.” Trade liberalization and capital mobility are “being unwound in favor of populist, anti-globalization, and protectionist policies.” The hopes and dreams of global free-market capitalism and democratic freedoms that sprang up in the wake of the fall of the Berlin Wall are being dashed, in a new world in which major nations (Russia, Turkey, Poland, Hungary, and China) are being run by gangsters.

One question Moyo fails to address is how China itself will fare if, as she suggests, the global order continues to crumble. Will it forever be the new model for growth? After all, for the last decade and a half, China has been allowed to pick the global economy’s low-hanging fruit. It was prematurely allowed into the World Trade Organization (and then broke all the rules). As the world clamps down on China’s intellectual-property theft and technological extortion, and resists China’s currency depreciation and dumping of its massive excess supply, the jury is out on whether China can continue its amazing growth performance.

China is now the global king of runaway debt. And China’s much-praised “Belt and Road” Asian–African infrastructure scheme, in which developing-economy governments are given high-interest loans for infrastructure investment but have to put up major national assets such as harbors as collateral, might not work in the age of the Internet. When developing-world social unrest explodes in the event of a loss of those assets, will Beijing be forced to call up the Chinese army to protect the Chinese companies that, in almost every case, are given the contracts for the infrastructure investment?

Having dissected the flaws in the democratic system, Moyo should focus in her next book on the flaws of modern capitalism. And that discussion should center not on Left versus Right, but on big versus small, and established versus entrepreneurial. Successful large corporations have too often developed self-protective mechanisms that stifle growth, and the small and entrepreneurial sectors have been left at a huge disadvantage. With today’s large tech platforms driving competitive upstarts into the ground (or buying them outright), is there a need for a 21st-century Teddy Roosevelt to wave the banner of “Small is beautiful”? Then again, what’s the response to those who claim that technological disruption itself is the real threat to capitalism?

One final thought: Liberals point to America’s inequalities of wealth and income (and Moyo makes the excellent point that on income inequality, China and America are virtually the same) and suggest redistributive solutions. But maybe the problem with capitalism is the delivery system itself. Over the last decade, most wealth created has been distributed through the stock market, not through increased wages. The big question is how to make a lot more working families capital owners. A lot of future wealth creation will happen at the global level, driven by productivity-enhancing technological breakthroughs with the exponential expansion of artificial intelligence. Affluent families with global stock portfolios will be able to tap into this bounty; mere wage-earners will not. Whether through birthright accounts or some other means of encouraging stock ownership, Western policymakers need to start thinking about how to make every citizen potentially a Davos man. The alternative is to experience the middle-class anxiety and unrest Dambisa Moyo so accurately describes.

David M. SmickMr. Smick is the chairman and CEO of the global macroeconomic advisory firm Johnson Smick International and the founder and editor of the magazine The International Economy. His latest book is The Great Equalizer: How Main Street Capitalism Can Create an Economy for Everyone.

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