America says: 'Do what we did, not what we say'

America says: 'Do what we did, not what we say'

Joseph E. Stiglitz, Professor of Economics, Columbia University,
Project Syndicate

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 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 U.S., I have always been struck by the divergence
between the policies that America pushes on developing countries
and those practiced in the U.S. itself. Nor is America alone:
Most other successful developing and developed countries pursue
similar "heretical" policies.

For example, both political parties in the U.S. 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
U.S. the government actively supports new technologies, and has
done so for a long time. The first telegraph line was built by
the U.S. Federal Government between Baltimore and Washington in
1842; the Internet, which is so changing today's economy, was
developed by the U.S. military. Much of modern American
technological progress is based on government-funded research in
biotechnology or defense.

Similarly, while many countries are told to privatize social
security, America's public social security system is efficient
(with transactions 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 U.S. Social Security System now faces a problem with
under-funding, so do 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 of 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, 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, while monopolies in cement significantly raise the
price of construction.

The American 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 creating thousands of jobs. Today,
U.S. 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 Ronald Reagan's deregulation of the Savings and Loan
Associations led to an infamous wave of bank failures that cost
American taxpayers several hundred billion dollars and
contributed to the economic recession of 1991.

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

Instead, developing economies should look carefully, not at
what America says, but at what it did in the years when America
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.