Do as the US says, not as it does

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

Joseph Stiglitz, The Guardian (UK), October 29, 2003

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.

Joseph Stiglitz, professor of economics at Columbia University, is a Nobel prize winner and author of Globalisation and Its Discontents

Yasser Arafat has a Nobel Peace prize.

What 3rd world countries need to do is deregulate their economies so that new businesses can grow, unimpeded by red tape.

Most of all, 3rd world countries have to sort out corruption, cronyism and buld free democratic socieities. Not socialist societies, as is the trens in South America nowadays, they must build free societies. All else follows from these reforms.

Free-market economics?

I guess you have never heard of the principle that "nature abhors a vacuum." Without any regulation, those with wealth and very little scruples quickly buy up the markets, cornering them. Then they enforce their rackets with criminal violence to ensure that they remain in the superior position.

It happened in the US with illegal booze during Temperance and it happened more broadly throughout Russia with the collapse of the Communist Party's hold on power.

"Investors benefit from weak Russian stocks

October 29, 2003

MOSCOW - The painful reaction of the Russian market to the arrest of Mikhail Khodorkovsky, the head of the oil company YUKOS, was due to the disappointment of Russian speculators in connection with their failed attempt to bull the market in recent days, a financial analyst told RBC TV...

...The Russian stock market collapsed on Monday, and trading even had to be suspended on MICEX and RTS. Some analysts suggested that Mr. Khodorkovsky’s arrest could lead to a 20 percent fall in Russian stocks in one week. They said the fall would affect not just YUKOS and Sibneft, and not only oil stocks, but almost all Russian shares. In particular, significant sales of Gazprom and LUKoil stocks were expected."

Third world countries should copy a sucessful model (like one of the asian ones) if they want to be sucessful. It is not rocket science.

I'm tired of billions of tax dollars being poured into 3rd world country only to end up in the pockets of some atrocious rebel group or tin-pot dictator.

Let them sort themselves out before we pay a penny more.

Bush is completing is 4-year mandate.

Since he took over unemployment is up. The already rich are geting richer, thanks to custom-tailored tax cuts at the expense of the poor, the middle-class, the environment and the economy. The average American is undoubtly worse off than he or she was under his predecessor.

Bush is doing exactly what Halliburton, GE and Wall Street tell him to do because they are the ones who bought his way to the White House and want a good return on their investment.

Bush Admirer is unable to change. He'll keep digging with his bare hands when his shovel breaks.

Do yourself a favor, step outside the gates of the base once a while. It will take all your courage to realize how different it looks from what they tell you at the Young Republican Lounge.

Bush is Hitler blah blah blah stole the election blah blah blah blood for oil blah blah racist brown shirt blah blah got what we deserved on 9-11 blah blah blah blah fuck the pigs blah blah blah we are peace protestors blah blah anarchists blah blah death to the elites blah blah blah blah Haliburton blah blah fuckin' sheeple blah blah blah non-critical thinkers blah blah blah my first ammendment rights blah blah blah blah blah blah...

Problems simply go away if you hide them, isn't it my dear? There is a lot of that stuff going on right now at the White House.

I'll cut you some slack; you just couldn't fend off reality and reacted by posting the above "blahblah" garbage to make it look like a reply.

An ordinary comment, from an ordinary troll. Can't expect much from it anyways.

What problems???

Some people are never satisfied unless they can find something to whine about or invent a problem to whine about. It's so important for these folks to have someone to blame, it sure beats looking at themselves too closely and realising that their lives may be crap because they haven't got the moral fibre to make a positive contribution to society.

on your positive contributions to society?

Just for us, mere mortals.

Posting the old, tired, simplistic "whining left" cliche on IMC does not count.

It is always amusing to see the right self-appointing itself as guardians of morality. Their own brand, that is, the one that keeps labor cheap, an absolute necessity their fortunes depend on since the moral fiber gifted wouldn't be able to earn that money without the contribution of the many low-wage workers.

Go ahead, enlighten us.

it's very good, yummy!!!

"...because they haven't got the moral fibre to make a positive contribution to society."

Please elaborate on your positive contributions to society.