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World: Analysis from Washington -- Economic Orthodoxy Falls Into Traps

Washington, 14 January 1998 (RFE/RL) -- The crisis in the economies of the countries on the Pacific rim and the success of the U.S. economy has led some analysts and political leaders to self-confidently conclude that the current situation proves that the American model of capitalism is inherently superior and should be applied everywhere.

Such conclusions are unlikely to prove anymore justified that were those of the same analysts and leaders a decade ago who concluded that the success of Japan and the so-called "little dragons of Asia" demonstrated that Japan, Inc., was the model for future economic success.

Both then and now, such a single orthodoxy on economic questions can lead both governments and international financial institutions to take steps that may if past history is any guide prove self-defeating or even counterproductive.

Part of the reason for this is that no economy ever starts completely over. There are traditions and ways of doing business that inform the behavior of individuals and governments even when they are part of entirely new structures.

In Russia and many other post-communist countries, the international community pushed the Russians to adopt a series of market reforms. But even when the Russian government did what it was asked -- and that did not always happen -- the individuals who populated these new economic institutions often continued to behave in the same old way.

Another part of the reason that such an approach may be counterproductive is that economics is never completely isolated from politics. Even if it is given with the best of intentions and even if it in fact may be well-founded, no advice that requires large groups of people to suffer for very long is likely to be tolerated.

At the present time, the International Monetary Fund is proposing some very harsh medicine to the countries of the Pacific rim. And various Western officials and bankers are telling these countries that they have little choice but to swallow this medicine if they want to resume economic growth.

But at least some people in these countries are likely to conclude that such advice is anything but disinterested, that it is allowing Western companies to buy up assets in their countries, and that it will result in the mortgaging of their future to others.

And such people may decide that for them the cure is worse than the disease even if it is in fact a cure.

To the extent that happens, some of these countries may retreat into economic isolation claiming that they can pursue their own national way to a return to prosperity. Others may take that another step further and lash out at their supposed guides to a return to economic prosperity. And still others may seek to ally themselves with others similarly situated.

And still a third part of the reason for concluding that such self-confident advice may prove self-defeating is that economic models never comprehend all the developments taking place within an economy.

That is one reason why there are so many such models: Each captures one or more parts of the economic task. Some are clearly more workable than others. But none explains everything everywhere for all time.

A decade ago, the Japanese system of active cooperation between the government and major corporations appeared to many observers to be not only the wave of the future but even the only possible approach to economic development as the twentieth century approached its end.

And at the same time, the American system in which government did not get so actively involved with individual firms in promoting economic development looked anemic by contrast.

Now, the images of the two have been reversed: The Japanese model looks like a failure, and the American one like the only possible path to the future.

But a closer examination of both countries suggests that the difficulties of the Japanese economy had their roots in more than just the close ties between government and business and the success of the American economy over the same period reflected more than the model that is now being offered to others.

Indeed, one of the bases for American success now appears to be that the U.S. government has become far more active in promoting U.S. trade abroad.

That is not wrong, nor are the current prescriptions the IMF and others are passing out necessarily incorrect. But at the very least, these considerations suggest that anyone who attempts to guide any economy on the basis of a particular orthodoxy is likely to quickly discover its limits.