[A-List] US economy: Stiglitz critique

["Michael Keaney" <michael.keaney@xxxxxx>]

Do as the US says, not as it does

America preaches free markets, but at home it's a different story

Joseph Stiglitz
Wednesday October 29, 2003
The Guardian

Today, many emerging markets, from Indonesia to Mexico, are told that there
is a certain code of conduct to which they must conform if they are to be
successful. The message is clear: here is what advanced industrial countries
do, and have done. To join the club, you must do the same. The reforms will
be painful, vested interests will resist, but with enough political will,
you will reap the benefits.

Each country draws up a list of what's to be done, and each government is
held accountable in terms of its performance. Balancing the budget and
controlling inflation are high on the list, but so are structural reforms.
In the case of Mexico,opening up the electricity industry, which Mexico's
constitution reserves to the government, has become the structural reform of
the day demanded by the west. So analysts praise Mexico for its progress in
controlling its budget and inflation, but criticise it for lack of progress
in electricity reform.

As someone who was intimately involved in economic policy making in the US,
I have always been struck by the divergence between the policies that
America pushes on developing countries and those practised in the US itself.
Nor is America alone: most other successful developing and developed
countries pursue "heretical" policies.

For example, both political parties in the US now accept that when a country
is in a recession, it is not only permissible, but desirable, to run
deficits. Yet developing countries are told that central banks should focus
exclusively on price stability. America's central bank, the Federal Reserve
Board, has a mandate to balance growth, employment, and inflation - a
mandate that brings it popular support.

While free marketers rail against industrial policy, in the US the
government actively supports new technologies, and has done so for a long
time. The first telegraph line was built by the US federal government in
1842; the internet was developed by the US military; and much of modern
American technological progress is based on government-funded research in
biotechnology or defence.

Similarly, while many countries are told to privatise social security,
America's public social security system is efficient (with transactions
costs a fraction of private annuities), and customers are responsive to it.

While the US social security system now faces a problem with under-funding,
so does a large fraction of America's private pension programmes. And the
public pension system has provided the elderly with a kind of security -
against inflation and the stock market - that the private market has not.

Many aspects of US economic policy contribute significantly to the country's
success, but are hardly mentioned in discussions of development strategies.
For more than 100 years, America has had strong anti-trust laws, which broke
up private monopolies in many areas, such as oil. In some emerging markets,
telecom monopolies are stifling development of the internet, and hence
economic growth. In others, monopolies in trade deprive countries of the
advantages of international competition.

The US government also played an important role in developing the country's
financial markets - by providing credit directly or through
government-sponsored enterprises, and by partially guaranteeing a quarter or
more of all loans. Fannie Mae, the government-created entity responsible for
providing mortgages for middle-class Americans, helped lower mortgage costs
and played a significant role in making America one of the countries with
the largest proportion of private home ownership.

The Small Business Administration provided the capital to help small
businesses - some of which, like Federal Express, have grown into major
businesses. Today, US federal government student loans are central to
ensuring that all Americans have access to a college education, just as in
earlier years, government finance helped bring electricity to all Americans.

Occasionally, America has experimented with free-market ideology and
deregulation - sometimes with disastrous effects. President Reagan's
deregulation of the savings and loan associations led to bank failures that
contributed to the recession of 1991.

Those in Mexico, Brazil, India and other emerging markets should be told a
different message: do not strive for a mythical free-market economy, which
has never existed. Do not follow the encomiums of US special interests
because, although they preach free markets, back home they rely on the
government to advance their aims.

Instead, developing economies should look carefully, not at what the US
says, but at what it did in the years when it emerged as an industrial
power, and what it does today. There is a remarkable similarity between
those policies and the activist measures pursued by the highly successful
east Asian economies over the past two decades.