Niall Ferguson, 2012 Agora Financial Investment Symposium
Niall Ferguson led off the symposium began by lamenting that just 23 years ago, it all seemed so simple.
It was the summer of 1989, he reminded us, when Francis Fukuyama famously proclaimed “The End of History,” declaring the ultimate Triumph of the West, with the impending fall of the Berlin Wall:
“An unabashed victory of economic and political liberalism … the Triumph of the West. … The end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.”
Fast Forward 23 Years Later…
We are just four years away from China overtaking the US as the world’s largest economy, as he shows a “GDP market share” graph with an undeniable trend in China’s favor.
In 1989 it looked like business as usual in China, when tanks at Tiananmen Square crushed democracy movements. But China’s rise was already in motion – as was the relative decline of the West.
End of Western Dominance: One of the Great Themes of our Time
What went wrong for the West? For starters, he said, we decided to re-run the Great Depression.
Ferguson counts only three Great Depressions in recorded history – 1872, 1929, and 2007. A small sample size, he admits.
Our current depression eerily marched in lockstep with the Great Depression until June 2009.
But then we pulled out of despair, and now find ourselves perhaps in similar territory as the Great Depression of the 1870s – which wasn’t as deep, but lasted longer. Maybe our experience is morphing into something closer to that of the 1870s, Ferguson mused.
What’d They Do in the 1930s? OK, Do the Opposite
Our current policies are the exact opposite of those employed in the 1930s, Ferguson points out. As a result, we now have a generalized crisis of public debt on our hands. Policy makers picked up Keynes’ General Theory and applied the “borrow and spend to avoid a depression” part.
The problem is that the theory is predicated on a country being in a strong financial position heading into the crisis – which the US was obviously not.
Now, the US is on a “clearly unsustainable fiscal path”, on the cusp of becoming the third most indebted country in the world on a debt-to-GDP measure (behind fellow debt poster children Japan and Greece).
US Fiscal Crisis and the Lingering “Slight Depression”
The only question in Ferguson’s mind is what form the US fiscal crisis will take:
- Pre-emptive austerity, which will slow the economy (perhaps significantly)
- A bond market blowout, as we are seeing in Europe today
Central banks are in a printing contest, but we don’t know if the current expansion of the monetary base will lead to inflation.
He sees two great clouds of uncertainty hanging over the developed world:
- Fiscal crisis in US and Europe
- Uncertainty about inflation
He believes these are the two reasons why the developed world is not bouncing back as usual, and the “Slight Depression” he refers to remains.
The Great Re-convergence of West and Asia
Ferguson plotted the relative per capita GDP ratios of the USA vs China and the UK vs India from 1500-2008 (yeah five centuries of data!)
There was a sustained divergence in the West’s favor for almost all 500 years, until 1978, when the average American peaked out as 22 times richer than the average Chinese person.
But after 1978, an astonishing re-convergence has unfolded, and the USA/China ratio now below 5.
Ferguson would not bet against this trend stopping – and said those in attendance who realign their portfolios betting on the ratio stopping here will not fare will.
The Rest have Downloaded The West’s 6 Killer Apps
The reason the East is on the move, Ferguson said, is that they’ve taken six highly effective plays from the West’s playbook.
1. Competitiveness (both political and economic) is moving East
This trend began with Japan’s Meiji restoration of the 19th century, but really got moving with the big populous Asian countries in the 1970’s getting their collective acts together.
2. Innovation seems to be moving East too
The scientific method – the way of thinking about the world that we associate with the 17th century scientific revolution – kicked off innovation in the West.
But Asia, after a slow three centuries, has caught on fast. Japan has led the US since the 1990’s in terms of patents granted, and more interestingly, China has recently overtaken Germany. (Though Ferguson quipped that most Germans vehemently deny the accuracy of this statistic).
The gap in standardized math scores is widening as well – 15-year old Chinese children lead their US counterparts by the same embarrassing length that American kids lead their counterparts in third-world Albania.
3. Rule of law is deteriorating in the West
“Rule of law (in the West) has morphed from the rule of law into the rule of lawyers. That is not the ideal rule of law,” he states – inciting a standing mental ovation from yours truly.
One reason the crisis in Europe is so dire is that the institutions of Southern Europe are in dire shape. There is a malaise in the institutions of Italy and Greece, which scored embarrassingly low (as in central Africa low) in a global rule of law study he cited.
4. US no longer has an edge in healthcare
Modern medicine – a distinct phenomenon that only began to increase life expectancy in the 19th century – has also seen Asia catch up, and in the cases of Japan and Hong Kong, surpass the West.
The US has the most expensive healthcare, but it is not the best, he lectured.
At least US life expectancy beats out the lackluster trends from Russia and Ferguson’s hometown of Glasgow, which he said lags in part due to a “diet of deep fried Mars bars, cigarettes, and scotch.”
5. Consumer society is also relocating East
The largest malls in the world are now in Asia. I can confirm that, after visiting Hong Kong and Singapore last year – their malls leave ours in the dust.
6. And it’s now an Oriental work ethic
These days the East just flat out works harder than the West.
The average South Korean currently works 1000 hours more per year than the average German. “Which is why when you go on vacation, the Germans are already there. And when you go home, they stay,” Ferguson explained.
“And how many of you woke up today before 6:00am?” he asked the audience.
Nary a hand went up – certainly not your authors’, who rolled out of his hotel bed nearly two hours after the deadline mentioned!
6 Big Questions for the Post-Western World
Ferguson then listed six “burning questions” facing our brave new post-western world:
1. Can the US solve the clash of generations?
“How is the generation that is currently in school going to pay for the vast liabilities of the baby boomer generation, either retired or about to retire?” he asked.
Ferguson believes the current generation will either pay double the tax rate of their parents and grandparents, or they will revolt and dismantle these entitlements.
“No way the US can pay these (entitlements) with current tax rates,” he warns.
2. Can Europe avoid a Jenga moment?
Ferguson channeled the game of Jenga as a metaphor for the Eurozone crisis, asking which country will be the block that sends the entire tower crashing down.
He sympathizes that impossible things are not only being asked of Southern Europe, but also German taxpayers – putting further strain on the tower.
3. Can the rule of law come to China?
Can China transition to a system where private property rights are secure?
“If China does not answer this question right, there is a close upper-bound to its development,” Ferguson explained.
He added a “score at home” game for the hometown Vancouver audience that a good barometer of progress will be number of Chinese people looking to buy apartments in their neighborhoods.
4. Can the Muslim world have a Reformation?
Ferguson believes that until the Muslim world gets its act together, there is going to be an upper-bound to their development as well.
5. Can Africa overcome Malthus?
He worries that Africa’s anticipated population explosion this century will put an untenable strain on their institutional resources. This is significant not only to Africa but the entire world due to Africa’s significant source of natural resources
6. Can the resource “curse” become a blessing?
Ferguson calculates $359 trillion in known resource reserves on Planet Earth (in case we get an unsolicited offer from the alien Bain Capital of the Andromeda Galaxy, he reasoned).
Most resource-rich countries are, of course, basket cases. Giving this talk on Canadian soil, he was cautiously optimistic that the resident Canadians in attendance can break this trend.
Bowing to the Post-Western World
In closing, Ferguson was kind enough to remind us in attendance that when welcoming our new Eastern masters, it’s enough to bow. A handshake is not needed.
Niall Ferguson is Laurence A. Tisch Professor of History at Harvard University. He is also a Senior Fellow at the Hoover Institution, Stanford University, and a Senior Research Fellow at Jesus College, Oxford, and has published twelve books. His most recent book is Civilization: The West and the Rest, also a PBS/Channel 4 documentary series.