The Barbarians Are Outside the Gates

by Tom Au

Is the twenty-first century going to be another American century? Or will it be more like a Chinese century? Investors are waiting for the answer to this one, because of its implications for capital flows and investment returns. My answer is that this could well be China’s century, but this will not necessarily be a theme that will be remunerative to many American investors, because it would be the result of a phenomenon that I refer to as the barbarians outside the gates.

Normally, the richest and most powerful country in the world is the one that is the most advanced socially and technologically. That is a good thing, because it creates a model for others to emulate. Examples include Rome, Britain, and America in different eras. Each created a technologically advanced “Industrial Revolution” (relative to their respective times), producing a world class economic power that also supported a world class military as well as a world-leading civilian standard of living. And when the “buck” shifted from Britain to America, it was a peaceful transition, partly because both countries were English-speaking and shared a common cultural heritage, and partly because it flowed naturally based on their respective levels of development.

There are important exceptions to this rule, however. One was the fall of Rome in the middle of the first Millennium to the Goths, Visigoths and other assorted Germanic barbarians. These people were not as nearly as advanced as the Romans. But they did have a compensating advantage of larger populations. The deciding factor was that when Rome started its decline, it hired progressively larger numbers of German mercenaries, thereby educating the foreigners and bringing them part way up to the Roman level. In combination with their larger numbers and Rome’s internal weakness, the “barbarians outside the gates” then became powerful enough to manage a “regime change.” But because they were fundamentally less advanced than Rome, the result was not a new, higher level of civilization, but rather one thousand years of Dark Ages.

China appears to be this exception, not the rule. For instance, if China, which has four times as many people as the United States could attain a per-capita GDP one third of ours, it would have a total GDP one third larger (four-thirds of ours). But the standard of living, which is what really counts, would still be lower than in the United States. Despite recent advances, China is still somewhat backward technologically, and much behind America socially and financially. Unfortunately, a large proportion of its growth comes from applying American (and other Western) techniques and practices, which are copied, rather than being developed internally in China. This is the real issue behind Chinese espionage in the United States (which is hushed up), technological “piracy,” and intellectual property infringement. In essence, the Chinese are doing to the Americans what the barbarians did to Rome; absorbing their more advanced culture and diffusing it among their larger population to produce a nominally stronger entity.

If there were a transfer of power from West to East, it would be due more to the fall of American civilization than the rise of Chinese civilization; the Chinese would then be the barbarian outside the gates. The result would be, as Winston Churchill warned, regarding another set of barbarians, that “the whole world, including the United States, including all we have known and cared for, will fall into the abyss of a new Dark Age made more sinister, and perhaps more protracted by the lights of perverted science.”

Unfortunately, it is almost inevitable that it will happen someday, Let us hope that this does not happen in our lifetimes.

Editor’s Note: Thomas P. Au, CFA, is a principal with R. W. Wentworth, a financial services firm in New York City. Earlier he was an emerging markets portfolio manager for the investment arm of Cigna Corp. and an analyst with Unifund, S.A. of Switzerland and Value Line. He graduated cum laude with a B.A. in Economics and History from Yale University and an M.B.A. in Finance from New York University. Mr. Au is the author of “A Modern Approach to Graham and Dodd Investing.”

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