Wed, Nov 05, 2003 - Page 9 News List

Do what we did, not what we said

What the US pushes on developing countries is not what it practises itself

By Joseph Stiglitz

ILLUSTRATION: MOUNTAIN PEOPLE

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. If you wish 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 is to be done, and each government is held accountable in terms of its performance. In all countries, balancing the budget and controlling inflation are high on the list, but so are structural reforms. In the case of Mexico, for example, 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 -- mindlessly, one is tempted to say -- praise Mexico for its progress in controlling its budget and inflation, but criticize 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 practiced in the US itself. Nor is the US alone: most other successful developing and developed countries pursue similar "heretical" policies.

For example, both political parties in the US now accept the notion that when a country is in a recession, it is not only permissible, but even desirable, to run deficits. Yet all over the world, 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 -- and it is 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 between Baltimore and Washington in 1842; the Internet, which is changing today's economy so markedly, was developed by the US military. Much of modern technological progress in the US is based on government-funded research in biotechnology or defense.

Similarly, while many countries are told to privatize social security, the American public social security system is efficient (with transaction costs a fraction of private annuities), and customers are responsive to it. It has been pivotal in almost eliminating poverty among America's elderly.

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

Correspondingly, many aspects of American economic policy contribute significantly to America's success, but are hardly mentioned in discussions on development strategies. For more than a hundred years, America has had strong anti-trust laws, which broke up private monopolies in many areas such as oil. In some emerging markets, telecommunications monopolies are stifling development of the Internet, and hence economic growth. In other markets, monopolies in trade deprive countries of the advantages of international competition, while monopolies in cement significantly raise the price of construction.

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