Eamonn Fingleton's 1995 book Blindside never fails to remind me of that famous verse from the Book of Ecclesiastes: "Vanity of vanities, all is vanity." Published just one year after the release of Hollywood blockbuster Rising Sun, Blindside reflects the decade's conviction that Japan was on a one-way path to global economic domination. Its subtitle – “Why Japan is still on track to overtake the US by the year 2000” – says it all.
Back in the early 1990s the world looked to the Japanese economy as its ideal: from keiretsu, the uniquely Japanese structure of large conglomerates, to the volunteer problem-solving groups known as quality circles. And yet this valorization reached its peak just before Japan's stock and housing market bubbles burst and ushered in the country's lost decade(s). Today, no one views Japan as a role model for economic policy: In fact, it haunts the global economy as a cautionary tale of mismanagement.
A string of economic idols came and went throughout the 1990s: first Japan, then the US, and finally “new Europe” with its Spanish economic miracle and Celtic tiger. Labor flexibility and deregulated financial markets became the new paradigms as allegiance shifted toward service economies at the expense of economic models based on manufacturing and industry. Alan Greenspan and Lehman Brothers CEO Dick Fuld – who was winning management awards right up until Lehman's collapse – were lauded as heroes.
Now yet another crisis has left a cherished economic model in tatters, and the world already seems to be on the hunt for new economic idols. We currently have two prominent front runners: Germany and China. Germany's proponents claim that its strength comes from its solid industrial base: In contrast to the US, the UK and the European periphery, tangible goods give German exporters their competitive edge, not intangible services. This view has its roots in a quite traditional Marxist worldview where only "things" matter.
But this overlooks the tremendous sacrifices Germany has made over the last decade in order to conserve its industrial base in a globalized world. German workers, for example, have not gotten any serious wage increases since 2000. These low labor costs would keep Germany ultra-competitive in Europe even with a stronger euro, but we cannot ignore the extent to which Germany benefits from the currency's weakness. Add to this the current Eurozone interest rates, which are far too low for the booming German economy, and we begin to see the danger of new bubbles fueled by cheap credit.
China, the other new economic role model, occupies a similar situation in terms of monetary policy. Its peg to the US dollar means interest rates are too low, and the country is already experiencing inflation pressures and a few real estate bubbles. Furthermore, China's much-praised long-term planning – which is not subject to short-term considerations like elections or quarterly corporate results – could soon outlive its usefulness. Long-term planning may be appropriate for an emerging market, but for a developed economy it can lead to overinvestment in losing sectors or hamper technological progress by underemphasizing competition and creative destruction.
Economic idols rise and fall like any other fad, and investors show a marked tendency to burn what they have adored and adore what they have burned. Yet careful analysis shows that all economic models have certain weak points, and their benefits come at the cost of corresponding drawbacks. The more openly these problems are discussed, the more likely we are to find workable solutions. Ironically, it is often the willful ignorance of idolatry that takes ordinary challenges and turns them into fatal flaw.
No comments:
Post a Comment