Looking for models in pursuit of prosperity |
By Kumiharu Shigehara, Head, International Economic Policy Studies Group. Formerly Chief Economist (1992-1997) and Deputy Secretary-General (1997-1999) of the OECD, and previously Chief Economist of the Bank of Japan Published on: March 06, 2003 |
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Do not underestimate some of the economic and political achievements of the last few decades. And do not overestimate some of the present transformations either. In the search for stability and prosperity, there is much to learn and no country has all the answers. |
Looking at the economic difficulties
of Europe and Japan these days, it is all too easy to forget some basic
historical truths: in particular, that over the last forty years, western
Europe and Japan have achieved unprecedented economic prosperity, and
that their progress followed two devastating and debilitating world wars.
Anyone that witnessed the flattened cities of Dresden or Hiroshima must
never have imagined the recovery that was to follow. Within two short
decades Japan and the former West Germany had established themselves
as the second and the third industrial powers after the United States. |
How did these so-called economic miracles come about? One
reason was a sheer lack of choice. Deprived of military power to secure
export markets and access to natural resources abroad after defeat, the
onus fell on their well-educated workers, business managers, bankers and
an eager new state to achieve results. True, they were helped in these
efforts by post-war international trade liberalisation and a generally
favourable external climate, but it was by working together and targetting
high value-added products, from automotive goods to science and technology,
that high economic performance and social progress became possible. In
effect, West Germany and Japan each forged their own market-based economic
models whose efficiency and social equity were exemplary of how free market
economies could succeed in the face of centrally commanded economies in
the Cold War period. |
This does not mean that the international relationships of
free market economies were always smooth. In the 1960s, expenditure increases
associated with the Vietnam War and increased inflationary pressure in
the United States started gradually to undermine the gold and foreign exchange
system with the US dollar as the primary reserve currency. The shift from
the fixed exchange rates of Bretton Woods to the floating rate system introduced
for major currencies in 1973 strengthened the capacity of free market economies
to absorb external shocks. Indeed, had the floating rate system not been
in place, the economic management of countries highly dependent on imported
oil would have been disrupted far more by the two oil crises of the 1970s
than it actually was. However, floating currencies did not provide a panacea
for curing imbalances in external payments, nor could it free domestic
economic policy from external constraints. Flexible rates have sometimes
moved in abrupt and erratic ways that were difficult to explain in normal
economic terms. Sustained misalignments upset the allocation of productive
resources across free market economies and fuelled protectionist sentiment
in deficits countries, notably the United States. |
This caused particular concern in the late 1970s and 1980s
as both Japan and West Germany each ran persistent surpluses. These imbalances
became subject to both bilateral and multilateral surveillance. However,
uncertainties about the balance-of-payments effects of domestic demand
and exchange rate changes as well as failures of various attempts, including
those by the IMF and the OECD, to identify precisely the equilibrium levels
of exchange rates left room for ad hoc arrangements and at times unhelpful
political intervention. |
We still face this core challenge today:
how and on what basis to bring large global economies together so that
they might manage their
affairs in "mutual self-interest". Bilateral co-operation,
multilateral co-ordination, unilateralism, independence: all these are
possible, and
not necessarily in mutually exclusive ways. |