The global economy appears to be running on empty

By Larry Elliott

LONDON: There are few cast-iron rules of political economy, but one shines out. Whichever economy is seen as the exemplar of modern dynamism is the one about to go wrong, and the more it is lauded today the more seriously it will go wrong tomorrow.

So it was with Sweden -- a big favorite in the 1970s, Japan -- the seemingly unstoppable force of the 1980s, and Germany -- everything that the Anglo-Saxon model was not, in the 1990s. America is now the epitome of economic virtue, with a combination of labor market flexibility and dog-eat-dog entrepreneurship making it that much more effective than any other leading economy, and certainly in a different league from those ossified wrecks, Japan and Germany.

The Organization for Economic Cooperation and Development (OECD) certainly takes this view. Last week's annual health checks by the West's leading economic think tank on Japan and Germany had some pretty tough words to say about the world's number two and number three economies.

Behind the OECD's specific recommendations lies a more strategic analysis of the alternative forms of capitalism developed in Japan and Germany in the postwar era. Japan's version was -- to an extent -- based on the idea of a developmental state, that governments had a role in shaping the framework in which the private sector could flourish. Germany was what David Coates in a new book Models of Capitalism calls negotiated capitalism, a corporatist model which entrenches worker rights and gives labor a partnership role in decision- making.

A decade ago, both the Japanese and German models were seen to have real strengths. In the mid-1980s, Japanese industry was wiping the floor with the United States, taking market share in a range of industries from cars to semiconductors. Germany's investment in training and education and its structure of industrial finance, which put banks on the boards of companies, was seen as long-sighted and humane. It was venture capitalism, not vulture capitalism.

How times change. This was the OECD last week on Japan: "Progress has ... been made in taking some of the key structural reform decisions and implementing others that will no doubt serve the country well in the future by bolstering the role of markets rather than government in allocating resources. There should be no let-up in this process."

In Germany, it called for enhanced labor market flexibility as well as "structural reforms that strengthen individual initiative, economic choice and the role of competition". Germany's postwar social welfare model, in other words, is now seriously arthritic, with a pampered workforce likely to see their jobs exported to low-cost competitors. Where the eschewing of hostile takeovers was once seen as a strength, it is now -- witness the official rebuff of Vodafone's bid for Mannesman -- regarded as a chronic weakness.

Pushed to one side in this debate is any suggestion that Japan's and Germany's problems might not be the consequence of structural failings. Japan's problems, for example, began with the collapse of the bubble economy in the late 1980s. That, in itself does not mean its former reputation as an industrial power house was wrong. The size of its trade surplus suggests that it still produces plenty of goods the world wants to buy. Similarly, there are those who say that Germany's malaise is not rooted in supply-side failings but stems from year after year of deflationary macro-economic policies.

That may be so, but it is not the current received wisdom, which is that trust-based or state-driven models of capitalism no longer work. The only model that can deliver is a market-based model, with government's role confined to measures that will improve competitiveness.

Parties of the center-left which have already embraced this option are feeling rather pleased with themselves. They perceive only two options -- the slash-and-burn pro-market policies adopted by the parties of the right, involving wholesale deregulation, attacks on labor rights and a nightwatchman state, and their own progressive pro-market policies designed to enhance international competitiveness through active labor market policies and new growth theory. In the old pre-globalization days, all sorts of economic models were viable: in the new, much harsher conditions of the late 1990s, governments can only offer variations on a market-dominated theme.

The fact that the United States and UK, which have moved further and more quickly down this road, have enjoyed stronger growth and lower unemployment than Germany and Japan in the 1990s has merely added to the feeling that trust-based capitalism is a luxury that can no longer be afforded. Both the Clinton administration in the United States and the Blair government here have been basking in the warm glow of praise from every conceivable international organization. For Britain, being praised more highly than Germany by the International Monetary Fund and the OECD is like the school dunce suddenly turning the tables on the class swot.

In his book, Coates offers a different view. He argues that the recent economic record of the United States and UK is not all its cracked up to be, and that it is time the new breed of center-left theorists recognized the poverty of their vision. "What re-skilling as a growth strategy does is leave investment as a Dutch auction in which local labor forces (and local states) bid -- like whores -- for the favors of mobile capital."

For all the current mood of triumphalism in the Anglo-Saxon world, there is some truth in both his assertions. The main factors behind the recent U.S. success are either temporary -- the weakness of the dollar -- or unsustainable (the 20-year- period in which real wages fell and hours worked rose). Take out special factors, including America's shameful record of male incarceration, and you find that the U.S. employment rate for prime-age males (25-54) is no better than that in France.

In Britain, the government's competitiveness indicators released this week show that UK living standards still lag behind much of the developed world, despite -- some might say because of -- the longer hours we put in.

Against that background, it is not difficult to see why German workers, for example, are not deliriously happy about the idea of importing the third way. But, according to Coates, all the traditional consensus model can do is delay and ameliorate change, not halt it.

The problem, he says, is not one particular model of capitalism but capitalism itself. For a while, trust-based and developmental state models delivered outcomes favorable to both capital and labor, but only because the limited mobility of capital at a time of postwar reconstruction made it possible to strike bargains at a national level. However, international mobility of capital coupled with a more difficult environment for capital accumulation has encouraged a much more aggressive form of capitalism, in which labor rights and generous welfare states have to be sacrificed on the altar of international competitiveness.

But this model, too, is under strain. "The intensification of pressure on wages, working conditions and job security is increasingly triggering workers' protests across this global capitalism," Coates says. The response from center-left parties, so far, has been to butter up global capital and tell workers that they need to work smarter, harder and longer for less. This is not a compelling narrative and what is needed is for parties of the left to recognize that the global economy is running on empty.

Once they have done that, they can start to construct an alternative scenario based on guaranteed global labor standards, controls on the movement of capital, taxation of speculation and greater state control over investment decisions. Will this happen? Don't bank on it.

-- Guardian News Service