It doesn’t happen too often that an investment banker quits her highly paid job with Goldman Sachs and becomes a public intellectual. Two years ago Dambisa Moyo did exactly this. The 42 year old Zambian is quite successfull in her second career. Her first book, “Dead Aid – Why Aid is Not Working and How There is a Better Way For Africa” immediately became an international bestseller in 2009. Her second book “How the West Was Lost – Fifty Years of Economic Folly – And the Stark Choices that Lie Ahead” has just been published (and got severely beaten by “The Economist”, in part because of some hair raising factual errors) .
I’ve recently met Dambisa for an interview in London where we’ve talked about the remuneration of Wayne Rooney, the finanical crisis, human rights and why the West should forget China and focus on its own issues.
Question: Dambisa, in your new book you argue that “the West’s behaviour over the last fifty years has been like that of a profligate son, squandering the family wealth garnered over the centuries”. However, since 1960 U.S. GDP has increased 4.5 times… ´
Answer: … Yes, but what about debt?…
Q: … and life expectancy has increased by ten years.
A: Yes, but look at the debt. The U.S. deficits are running at 10 percent.
Q: Sure, but that’s mainly due to the financial crisis…
A: Not completely.
Q: … as well as the tax cuts of the Bush administration and the Iraq war.
A: No, that’s not true at all. All of these things are fed in. But if you’re saying that without the financial crisis things would be fine, I think you’re wrong. The financial crisis in part happened because of excessive borrowing and policy making. Many banks would not have lent money to Subprime borrowers without there being a policy called “housing for all”. Without those governemnt guarantees they would not have lent money.
Q: So you are telling me that bad policies induced the poor banks to do bad business?
A: I can tell you that most people in the banking sector would not have lent to subprime candidates if there would not have been guarantees. It just was not a viable business. It became a viable business because the government stepped in. There was no money to be made in that area before. And banks are there to make money. What happened is the growth of derivatives market. The banks parceld up the risks. In that sense banks are culpable, because they magnified the problem. But to say that banks are the only culprit…
Q: I’m not saying that. But the financial industry lobbied for deregulation quite massively.
A: Lobbying of course exists but it’s too simple for policy makers to say: “Oh well, it’s not us, it’s the banking sector”. Don’t governments have the right to say “No”? They are in charge of the policy environment. They can shut down the banks tomorrow if they want. They are responsible. They determine the interest rate, they determine reserve requirements, they determine the amount of money that’s in the system. So why can’t they just say: You can’t do this?
Q: Would you agree that the basic theme of the book is that the potential growth rate in the West is declining while it is increasing in China and other emerging markets?
A: Well, I don’t think that that’s really controversial in itself. China has a much bigger labour market than the U.S. If China can get it’s level of education to a certain level output will be higher than in the U.S. The real issue is productivity. With regard to productivity I think the West still has a cutting edge. The problem is that the West has not invested in education. So who is the one who is going to come up with the new, most innovative strategies for creating the next Google or the next iPad?
Q: What’s wrong with China having the next big idea?
A: There is nothing wrong with that per se.
Q: Then why should we care?
A: Living standards are clearly going to decline in the West.
Q: Are you talking about living standards in absolute or in relative terms?
A: In absolute terms it’s clear that China is going to grow faster unless there is some massive catastrophe. On a a per-capita basis we don’t know if China can be like the U.S. at this point of time. We don’t know because there are resource constraints.
Q: Let’s focus on the West. Do you think that living standards will decline in absolute terms here?
A: Yes. Let’s take the case of the U.S. right now. It’s got millions of people out of work in manufacturing. Those jobs are not coming come back unless the Americans become more protectionist. What happens to the living standards of those people? Their incomes are going to come down.
Q: But you’re talking about living standards of a certain proportion of the population, aren’t you?
A: Right, but it’s a growing proportion. And in addition, in order to keep infrastructure, public goods, health care in place, taxes have to increase. And guess who is going to be taxed: The people who have got high incomes. This is why their living standards are going to decline as well.
Q: Are you in favour of more government intervention or in favour of more free market capitalism?
A: I really do believe that governments have a absolute important role to play. They are there as regulators, they are there as providers of public goods. Certainly in a place like Africa infrastructure is a public good. National security is a public good. But look back in history. Which are the countries that have been able to meaningfully reduce poverty the most and grew the fastest? Those were the countries where governments created incentives and encouraged private sector participation. Innovation does not come from governments, it’s the governments creating the environment where that can happen. China is benefiting now precisely because they have adopted that idea.
Q: In your book you’re arguing that sport stars are earning too much in western societies. Your point is that high wages for sport stars are distorting incentives for young people who just want to become the next Wayne Rooney and don’t learn anything at school: “There is clearly an externatlity to society of having a larger number of pepole attemptin to make it to superstar level and failing, and not developting widely usable skill”, your say in your book. Where is the empirical evidence for that?
A: If you’re looking for empirical evidence I think… google it! There are a lot of papers about this. If you look at “Freakonomics”, for example…. Why are you grimacing?
Q: Well, because I don’t like the stuff Levitt is doing too much. But he does not have a paper on the remuneration of sport stars anyway.
A: No, but there is a similiar paper about drug dealers. It’s the same argument. What I’m saying is: There is a culture in Western society right now which discourages people from getting educated. It’s as simple as that.
Q: Let’s focus on the sports argument for a second. There is a bunch of papers about obesity problems in the industrialized World. The problem is most severe among poor people with little education. Doctors are also complaining that young people don’t exercise enough. Frankly, this is I think you’re making a highly simplified point.
A: It’s an opinion based on looking on the trend in statistics in the U.S. and in Europe of people who are going to school and also the costs of children who are not going to school.
Q: But if these kids really would try to become a sports star they would be fit and not fat.
A: That’s you saying that. Where is your data for this?
Q: Well, there is a bunch of papers dealing with obesity issues….
A: Did you see the film “The Blind Side” with Sandra Bullock? It was about a very fat child in the US who was playing football and ends up in the NFL. I don’t think there is necessarily a correlation between people playing American Football for example and being thin. In Amercia you can join NFL and be overweight very easily.
(I’m shaking my head)
A: You don’t think so? You think NFL football players are slim?
Q: They are not slim like fashion models are but they are fit and full of muscles.
[See comments section below for further discussions about obesity in the NFL]
A: Anyway, the point of the matter is that it was an opinion. I’m not backing it, I’m not saying: here is empirical evidence. … Why are you grimacing again?
Q: Well, you’re making some policy recommendations with regard to the question how sport stars should be taxed. Such recommendations should be based on empirical evidence from my point of view.
A: First of all, my point is more general. I’m arguing that western societies pay large premiums to people who are in certain sectors that do not necessarily bring broader benefits to society. I do also talk about hedge fund managers, I talk about CEOs. The difference, of course being that those people do have skills that they could transfer into another industry. I’m not pro additional taxation. What I am saying is that you live in a society right now where there are bigger incentives to go to do X-factor and football than there are to go to study maths and science.
Q: There are two and a half pages on political freedom in the book. Your are coming to the following conclusion: “In a competitive and brutal world order, such as we have today, it is foolhardy to expect the Rest to abandon their aggressive strategy that has, thus far, proven to be successfull.” What exactly is your point? Do you think the West should not insist on human rights anymore?
A: What do you mean by “insist on human rights”? The West trades with Saudi Arabia and Libya. There is a British High Commissioner and an American ambassador in Zimbabwe. What do you mean by “insist on human rights”? Let’s start there because that suggests they actually care about human rights.
Q: What it means, for example, is raising the issue of people going to jail for a decade in China without having a fair trial…
A: You mean like Guantanamo Bay?
Q: You’re absolutely right. The U.S. isn’t really living up to the promise as well but there is no Guantanamo Bay in Europe.
A: Doesn’t Britain sign up contracts with Libya? Or with middle eastern countries where women are considered oppressed?
Q: So do you think there are only two ways of dealing with the issue. Either not trading with those countries at all or…
A: I live in the real world. If you asked me: Dambisa, what you think the world should look like I could tell you what I think could be ideal. I think we should absolutely hold people to standards of human rights. I think we should absolutely have free trade so that Africans are not left to die of hunger because they cannot sell the goods that they have. But that’s all theory. We live in the real world. And where is the evidence that the United States or Europe cares about human rights? Do they not deal with those countries? 50 percent of trade now in Germany goes to China.
Q: That’s not true.You’ve also used this number in your recent lecture at the London School of Economics, but this figure is inaccurate.
A: How much is it?
Q: I would guess it’s around eight or nine percent. France is the most biggest buyer of German exports with a share of around ten percent.
A: I’m going to write this down and I will double check.
[Two hours after the interview Dambisa dopped me an email: “This is what I should have said - 43% of EU exports to China are from Germany” According to the German statistics office, in 2009 4.5 percent of all German exports went to China. This means China is Germany’s 8th most important trading partner. ]
Q: All I’m really trying to understand is what are you arguing for with regard to political freedom.
A: What I’m saying is: In the real world nobody really cares. Don’t pretend that you’re caring about human rights. What you care about is jobs and money. By “you” I mean the global ethos.
Q: One of the main messages of your book is that the West is too focused on China. Why’s that?
A: My point is: Forget about what China is doing. It’s broadly irrelevant. Focus on your own issues like education, pension costs and health care costs. These issues have nothing to do with China. That’s the fundamental point of the book. The Worlds needs a strong Western economy. It needs a strong Europe, it needs a strong U.S. Nobody wants to live in a world where China is the dominant force and everybody else is beholden. But that is the world you’ve created. The Western countries are beholden. We’re all indebted and we have serious problems. Not because of something China has done but because of Western policy. But these are choices. Tomorrow the Americans could say: No, we are not going to take another dime from China.