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posted on 12 November 2017

Why So Many In The West Are Pissed Off

from Lakshman Achuthan, Co-Founder and Chief Operations Officer of ECRI

Campaigning to “Make America Great Again," Donald Trump swept to the presidency last November 8, buoyed by a wave of anger and sense of betrayal in the American heartland. He knew that, for many, the American Dream had receded inexorably beyond reach, lingering only in distant memories. Critically, American parents no longer expect what had been virtually guaranteed in the mid-20th century - that our children would be better off than we are.

It isn’t just less-educated middle-aged White Americans who believe that American greatness will be restored by pushing back hard against the “other," including China, India, and immigrants who don’t look like them. A much larger part of America seems open to the simple notion that what ails us is someone else’s fault. This is because hardly anyone on the right or the left realizes just how fleeting the dominance of the West - and the U.S. in particular - has been in the longer sweep of human history.

Few appreciate the uncomfortable fact that, while China and India have advanced rapidly in recent decades, even this is only a partial reversal back to the historical norm. A two-millennium perspective - derived primarily from the lifework of Angus Maddison - shows that, for more than 90% of the time, China and India dominated the world economy, together accounting for about half or more of global GDP in terms of real purchasing power (Chart 1).

In year 1, India’s share was nearly a third of global GDP and China’s was over a quarter - both bigger than the Roman Empire’s. Rome had a huge trade deficit with China, whose silk was worth about its weight in gold. Pliny the Elder was so incensed that he viewed the diaphanous fabric as “transforming wives into adulteresses and maidens into prostitutes, while also threatening to make Roman men effeminate," noted one scholar. In turn, the Roman Senate, attempting to staunch the outflow of gold, prohibited the wearing of silk by men. At the time, Asia produced almost three-quarters of global output. A thousand years later, that proportion had declined only a little.

China and India ruled the roost for the vast majority of the last two millennia and, until the late 19th century, each had a bigger global GDP share than the U.S. However, the picture looks quite different if we zoom in on recent centuries, as most do (Chart 2). By the mid-19th century Britain was waging the Opium Wars - with opium seen as the only commodity that could offset the ruinous trade deficit created by its voracious appetite for imported Chinese silk, ceramics and tea - helping to bring about the collapse of the last Chinese dynasty. And enormous shifts began with the rise of the West - shown by the blue areas of the chart - which then dominated the global economy by the mid-20th century.

Yet, that epic “moment" was the exception in the long history of world GDP. The rapid reversals of fortune depicted in the rightmost section of Chart 1 indicate just how breathtakingly fast the rise of the West was, and how equally swift the reversal of fortune has been.

Europe’s Industrial Revolution, which started in the late 1700s and soon spread to the U.S. - in combination with Western colonial exploitation - caused the plunge in India’s and China’s GDP shares between the early 19th and mid-20th centuries. In a span of just 130 years - from 1820 to 1950 - the GDP share of Asia, excluding the Middle East, plummeted from almost 60% to only 16% (Chart 2).

Following World War II, the U.S. reigned supreme, commanding more than a third of world GDP, while Western Europe’s share fell to well under a quarter. Yet, the combination still accounted for a record 57% of global GDP.

The mid-20th century marked the zenith of the West’s GDP share, which America dominated for decades thereafter. So it’s this period that “Make America Great Again" really harks back to.

For Asia, excluding the Middle East, the comeback started slowly, between 1950 and 1980. The climb then accelerated, with that share surging past 30% by the turn of the century, and standing at 43% today, a 160-year high.

Meanwhile, the combined share of the U.S. and Western Europe has fallen to just one-third - a 166-year low. And the U.S. share is now half of its mid-20th century peak. It’s the headlong pace of this decline that’s worthy of notice.

The far right side of Chart 2 includes the early 21st century, when the reversal of fortune really sped up. Just since the start of this century, Western Europe has lost nearly a third of its global GDP share, while the U.S. has lost more than a fifth - similar to the fastest periods of decline for China and India between the mid-19th and mid-20th centuries. It’s this swift swing of the pendulum, back from its mid-20th century extreme, that provides the necessary historical perspective for understanding the angst in the West today.

Until the mid-20th century, the two key factors driving the rise of the West relative to the rest were the Industrial Revolution and colonialism. But then came the twilight of colonialism, followed in recent decades by rapid technological catch-up in China and India - which isn’t over.

So, has the relative decline of the West and the rise of the rest run its course? If not, it’ll be a tall order for the U.S. to again command over a third of world GDP - or even the 22% share averaged over the Reagan years.

The decline in American dominance is driven by more than China and India’s resurgence. Separately, there’s been a downshift in U.S. trend growth, driven by demographics and productivity growth, as partly acknowledged by the latest IMF projections of five-year-ahead annual GDP growth: 12/3% for the U.S. - close to Fed and CBO estimates - compared to 5¾% for China and 81/6% for India.

In fact, their combined share of world GDP outstripped America’s in 2008 for the first time in a century, and today is one and a half times as large. In five years - based on IMF projections - it’ll be closer to double the U.S. share, or almost as much even if we sustain 3% growth, as optimists hope. Regardless, China is ready to "take center stage in the world," as President Xi Jinping just announced. India, with more favorable demographics, won’t be far behind.

For us Americans, it isn’t a reversion to mid-20th century levels of U.S. global dominance that matters most, but rather a fair shot at greater prosperity for our children. For sure, that will require more productivity-enhancing investment in physical and human capital. But it’s also critical that the resulting benefits reach the middle and working classes. Only then can the U.S. reclaim the mantle of the greatest land of opportunity the world has ever known.

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