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Sunday, May 29, 2005

IDEOLOGIES AND ECONOMIC PERFORMANCE: 4th Article in a Series

This is the 4th article in a buggy series on how ideologies and institutions --- political, administrative, legal, financial, and business-organizational, including the multiple links between states and markets --- have created over the last several decades two kinds of dominant economic models in the advanced industrial countries. One of them, statist-capitalism, dominates Japan and the EU-15 Continental countries of West Europe. The other --- market-oriented capitalism --- prevails in the English-speaking countries of Britain, Australia, New Zealand, the US, and (to an extent) Ireland and Canada.





What We're Up To Today

Three Tasks Dominate . . .

our argument today, which is a direct follow-up of the previous three articles in the series. To grasp what we're up to here, it will have helped if you've read those three earlier articles or at least run your eye over them; but in case you haven't, part one today will briefly summarize many of the main points found in those earlier articles. In the series' 1st article --- it was published on May 3rd --- you'll also find a brief account of the various reasons that lay behind Prof Bug's fairly long absence on this web site . . . to be exact, a good two and a half months, always assuming that it interests you.

Each of the three tasks divides the argument into a separate part.

1) In part one, you'll find a deeper analysis of the two dominant forms of capitalism in the industrial world than the earlier articles in this series were able to unpack. Among other things, some variants in each group of industrial countries will be carefully distinguished --- even though, in the end, it turns out that these variants don't obliterate the much clearer distinction between the English-speaking market-oriented countries and the state-capitalisms that prevail in Japan and the EU-15 Continental countries.

2) In part two, more importantly, you'll see that the market-oriented countries --- the USA, Britain, Australia, New Zealand, Ireland, and possibly Canada (something of a half-way house now between the two models) --- have noticeably outperformed Japan, Germany, France, Italy, Spain, and even most of the small EU countries on the Continent for a good 15-20 years now. What's more, those market-oriented countries that were former adherents to the state-capitalist model and developed an advanced regulatory and welfare-state economy after WWII --- Britain, Australia, New Zealand, and to an extent Ireland --- have also done much better since their dismantling of most of their state-capitalisms in the 1980s than they had in the earlier three decades.

What do we mean by "outperform" or "done much better"?

The answer's simple and straightforward: the ability 1) to generate a higher rate of growth in GDP and per capita income on one side, and on the other 2) to create more new jobs and hold down unemployment.

Right now in 2005, the average unemployment rate in the EU is over 10% --- higher still in France, and 12% in Germany. By contrast, the average rate of unemployment in the market-oriented countries is about half the EU level. Worse yet for the state capitalisms, you'll see that increasingly their unemployment is long-term and structural, rather than cyclical; and that long-term unemployment is especially hard on young people in the EU. Japan does better, at any rate as far as its official statistics go; but there have been doubts voiced both by Japanese and foreign economists that these statistics aren't fully accurate . . . a point discussed at length later on today.

As you'll see, part two has a lot of tables and diagrams to bring out these key differences in the economic performance of statist-capitalisms and market-oriented ones..

3) Part three turns to an analysis of what ails the statist-capitalist countries --- especially the big ones, Japan, Germany, France, and Italy (though not only them) --- when it comes to generating economic growth and job-creation . . . two huge deficiencies, it should be added, that reflect a more general malaise: waning economic dynamism and competitiveness.

As you'll find out, the key problem that underlies these deficiencies reflects a rooted failure to alter their economic status quo sufficiently to keep pace with radical changes afoot in global capitalism, now a good 25-30 years old: above all, a surge of radically restructuring technologies, a speed-up of globalizing forces, and marked shifts in economic dynamism outside Europe and Japan --- especially in Asia and the US. By contrast, the market-oriented countries have done far better on adjusting to these changes, and at the forefront of the successful adapters is the US itself.

A Foretaste Of What You'll Find

The following table --- reproduced from the previous buggy article in this series --- brings out this laggard performance in striking ways:

Real Per Capita Income As A Percent of the U.S. Level Untitled Document
  1955 1960 1970 1980 1990 2004
USA 100 100 100 100 100 100
Canada 72 73 78 92 95 77
Germany 53 66 73 78 79 67
Japan 21 30 56 66 79 69
France 49 59 71 77 77 68
UK 64 69 66 66 73 68
Italy 37 46 58 67 69 66


Sources: Richard Katz, Japan: The System That Soured; OECD; CIA WorldFactbook 

The next diagram is even more startling in the ways it brings out the huge US lead over the EU. Developed by Pavle Sicherl, a professor at a Slovenia university, as part of a recent study he did for the Association of European Chamber of Commerces --- published March 2005 --- it shows the huge time lag between the EU's economic situation in 2002 or 2003 in certain key indicators and the US's position a good 20 or 30 years ago, all depending on the measure selected. The text above the chart is the EU professor's taken verbatim, and all references to it and the chart should be strictly to this source:



Source: Pavle Sicherl, http://www.sicenter.si/td_echamb.htm

Professor Sicherl, whose study is both ingenious and illuminating, has also developed a diagram that shows how many years into the future the EU would need to catch up to the US in 2002-2003 on the same indicators, all depending on how much faster the EU would have to grow annually in order to match the US. As he points out, even the assumption that it would grow at a 0.5% annual rate faster than the US is doubtful. How to interpret the diagram is explained immediately after in Professor Sicherl's own words:



Source: Pavle Sicherl, http://www.sicenter.si/td_echamb.htm


"This graph shows the time needed for convergence with the US for the range of various scenarios of higher growth rates in the EU than in the US. For instance, if the R&D per capita would grow in the US at 3% per year and in the EU at 4% per year (an example of 1% positive difference in the graph) the equalisation would only happen in 2064 (even at a 3% positive difference scenario it would only happen around 2022). For GDP per capita, if yearly growth would be4% in EU and 2% in the US (at present the reverse might be closer to reality), the equalisation would happen only in2020. It is worth remembering, however, that in the recent past the respective growth rates for these indicators have been mostly higher in the US. In other words, even the worst scenarios above will only come about with a considerable EU improvement."



Two More Tasks Complete The Argument --- But in the Next Article


Why The Need For A Follow-Up Article?

The answer: quite simply --- nothing more exciting --- to keep today's argument, already quite long and full of tables and diagrams, from spilling over its boundaries. That seems a convincing reason, no? But note: seeing as how these next two tasks are integral to the entire buggy argument, it seems worth while taking a few seconds here to foreshadow them. There's another advantage for this here. Once you've read these foreshadowing comments, you'll be better armed to follow the twists and turns of the substantive argument that unfolds today in parts one, two, and three.

4) What explains the failure of the statist-capitalisms in Japan and the EU continental countries to adapt their economies to the jolting, high-tempo changes in global capitalism that won't go away --- just the contrary? Part four, which starts the follow-up article, tackles the problem from a new slant in this series using a Schumpeterian analysis. A great Harvard economist of the 1930s and 1940,
Joseph Schumpeter has recently garnered the recognition he deserves as the pioneer theorist of long-term economic growth that, he argued, is driven by three over-powering influences:

1. Revolutionary technological breakthroughs, which come in long-term waves --- roughly every 50-60 years since the start of the industrial revolution in the late 18th century --- and radically alter the ways in which humans work, live, and spend their leisure; and for that matter (something Schumpeter himself didn't elaborate on) alter the distribution of global power among potential great powers. The latest wave of radically restructuring innovations started in the early 1970s, with big advances in computers and later software that have revolutionized information and communications technologies in both the civilian and military sectors.

2. Bold, risk-taking entrepreneurs --- obsessed with dreams of glory and success (exactly like great athletes, scientists, scholars, artists, inventors, and other unusually talented mold-breakers) --- who dedicate their lives to creating and then expanding new start-up businesses that will bring the technologies successfully to the market-place. Think of Henry Ford and Andrew Carnegie and the moguls who built the Hollywood movie studios of the interwar period, or more recently Bill Gates as well as the founders of Intel and Amazon and Google and --- on a more prosaic level, but no less fundamental in their impact --- of McDonald's, Dell Computers, WalMart, and Costco.

Such risk-taking entrepreneurs haven't appeared in West Europe for decades --- most likely the risk-takers in Europe having long departed for the New World in the 19th and early 20th centuries; and the ones who stayed on, Jews and other outsiders, were probably killed off in the Nazi Holocaust. In place of risk-taking and compulsive dreams of success, what seems to prevail in the EU-15 today is a vacation-ethos that shapes the life-style of almost everybody, from bureaucrats and shopkeepers all the way through corporate, media, and university hierarchies. Two other dominant attitudes seem to jostle for center-stage in West European outlooks these days. One is an all-pervading anxiety about the future of their countries, not just economically, but culturally and politically as the largely alienated Muslim populations continue to swell in size while native European populations are shrinking demographically. The other adds up to a dreamland expectation that EU governments will be able to protect the existing economic status quo while somehow reviving their countries' economic vigor and competitiveness . . . at any rate if only the right political leaders could be found.

Those who wonder why so much anger and defiance of their mainstream political and bureaucratic elites were on display the last few days in France and Holland --- where large majorities told them to bug off in the referendum-vote on the new EU Constitution --- will find the root-causes in what we've just said . . . provided you add one more large source of anxiety among the European populations, Britain included: the huge surge of violent crime in Europe over the last two decades. Few Americans appreciate how scary this has been for Europeans. New York is now one of the safest cities in the world. The same is true of almost all big American cities these days, and the level of violent crime in this country places it in UN studies toward the bottom third of industrial countries. Australia and Britain are at the top, and most of West Europe place higher than the US too. So far, with a few faltering efforts, the mainstream politicians and governments in the EU have done little more than cluck-cluck and finesse these fears. The outcome? A big opening on the right for populist parties, including radical and racist ones like Le Pen's National Front in France.

For what it's worth, these same UN studies --- carried out every 4-5 years by a Dutch university team that uses sample surveys to probe the numbers of crime-victims across countries (a far more reliable measure than official crime statistics gathered by police forces) --- show that Americans are far and away the most confident of 25 or so industrial countries when it comes to going out in public places and having confidence in their police.


As for Japan, to return to our main theme here, new successful entrepreneurs haven't had any economic impact for decades either. In typical Japanese fashion, giant corporations tried instead to foster start-up spin-offs within their existing hierarchically structured organizations . . . a tactic also emulated by many EU companies. The result was predictable: total failure.

The consequences for Japanese and EU innovation have been marked and multiple. Big established corporations, to put it bluntly, have huge vested interests in perpetuating their own corporate status quo, and what follows for the national economy is fully predictable: without bold entrepreneurs to create new start-ups that will bring any revolutionary technologies successfully to the market place --- never mind create swarms of new jobs --- a country's economic status quo will harden all the more. By contrast, a good 75% of the existing Fortune 500 Companies in the US didn't even exist 30 years ago.


3. Schumpeter's third insight about long-term economic growth, which --- as it happens --- turns out to be the most relevant for our buggy purposes to explain why the English-speaking market-oriented countries have so noticeably outperformed their rivals that adhere to a state-capitalist system: specifically, the forces of creative destruction.

Meaning?

Simply said, the need of capitalist economies --- however wealthy or poor --- to let old and uncompetitive firms and industries run down or go bankrupt in order to free enough capital and human talent for new, more promising industries and firms, closer to the technological frontier, to take root and expand within the national economy. If they do adjust fairly quickly (jarring dislocations and all), then the national economy of a rich country will likely emerge reinvigorated and remain competitive despite its high wages compared to dynamic developing countries. If they don't adapt easily, then . . . well, they'll end up overwhelmed by mountains of market inefficiencies and experience the kinds of economic problems that the statist capitalisms of Japan and the EU countries exhibit these days in all directions.

5) The final task --- which, to repeat, will unfold in the follow-up article --- can be quickly sketched in. Thanks to our Schumpeterian analysis, we'll be able to probe more deeply the tenacious defenses that statist capitalisms have erected around the political and economic status-quo to blunt and resist the forces of creative destruction.

The earlier buggy articles showed that the failures to of Japan and the EU countries to overhaul and adapt their national economies to the powerful and relentless changes afoot in global capitalism --- one surge after another of revolutionary technologies, the fast-moving tempo of globalizing forces, and radical shifts around the world in economic dynamism (especially the emergence of new industrial competitors in Asia) --- reside largely in the ways in which statist-capitalisms are organized institutionally and ideologically, the two going hand-in-hand. In such systems, political logic turns out to trump economic logic; and more to the point, political calculations and maneuverings --- by governments, by politicians in opposition, and by a vast array of powerful private and semi-private vested interests lodged within the national economy that have clear political clout (not to forget the majority of the electorate) --- dominate the logic of market incentives and adaptation to the radical changes going on in global capitalism.

A Schumpeterian analysis illuminates this political logic in penetrating ways. The interactions of politicians and political parties anxious for electoral success on one side and electorates and huge vested interests on the other are what underlie the resistance to creative destruction in Japan and the EU Continental countries, in the upshot of which an increasingly ill-performing economic status quo is maintained and resistant to necessary fundamental changes.

Note quickly. Political calculations and maneuverings within the market-oriented English-speaking countries are no less marked by self-interested politicians and powerful vested interests that seek to defend the status quo. That's obvious. It's inevitable. People's self-interested behavior doesn't change when they switch from the private to the public sectors. Even so, these countries have one big advantage in adjusting to unremitting changes in their economic environment, technological or otherwise: their different ideological and institutional heritage limits the scope of politically inspired, invariably short-sighted policymaking to resist the high-pulsing forces of creative destruction and radical economic change.

Part One:
THE TWO DOMINANT MODELS OF CAPITALISM CLARIFIED


In earlier buggy articles, as you might recall, the two ideal-type models of capitalism --- the statist-capitalisms of Japan and the EU Continental countries and the market-oriented English-speaking capitalisms --- have been discussed at length. What needs to be done here is to deepen the analysis of each, and that means essentially two things: 1) showing what the countries that adhere to one or the other economic system have in common despite some variants in each group, and --- more important still --- 2) showing how the two groups nonetheless differ in fundamental ways.
The Utility of the Two Models And Real-World Variants

As a jump-off point, keep in mind a pivotal point about these --- or any --- models used in the social sciences: they deliberately simplify and abstract from a highly complex economic reality for analytical purposes. That's the whole point of modeling, whether quantitative or qualitative. It allows for a high level of generalization and comparison. Thanks to such abstraction, to put this claim more concretely for buggy purposes, the two models of industrial capitalism seek to distill the core logic of economic and political behavior within certain real-world economies --- those in Japan, West Europe, and the English-speaking countries: about 20 in all --- that have lots of institutions and policies in common with one another while differing among themselves in basic ways.

Our main conclusion from such modeling?

These 20 highly industrialized countries divide, in such basic ways, into two distinct groups. Five or six --- all English-speaking countries (Britain, Ireland, the US, Australia, New Zealand, and maybe Canada) --- adhere to market-oriented institutions and policies. The remainder, Japan and all the EU-15 Continental countries, have all institutionalized statist-capitalisms and pursued a host of policies --- regulatory, fiscal, welfare, and government spending --- that lump them together in basic manner. Above all else, the economic status quo in Japan and on the EU Continent has proved remarkably tenacious in spite of a waning economic performance over the last 15 years or so, and in the face of relentless changes unleashed in global capitalism for two decades or more now --- whether technological or matters of fast-moving economic and political forces --- that are working increasingly to their disadvantage.

What explains the chief reason for this perverse inertia? In plain language, it's because the logic of politics in statist-capitalist countries trumps the logic of market considerations . . . so much so that political calculations and maneuverings --- by governments, political parties in opposition, electorates, and a vast array of powerful interest groups --- tend to dominate market incentives and adjustments to the impact of these combined. By contrast, market-oriented economies have been able to outperform their state-capitalist rivals by allowing the logic of market incentives and adjustments to work their impact. All these points, it needs to be stressed, will be clarified later on in part three today . . . and even more in the next article where we'll apply a Schumpeterian analysis, using his concept of creative destruction.



Variants

Note immediately the key point here.

It doesn't follow from what we've said that there aren't some variants within each group of countries --- the English-speaking ones that embrace market-oriented capitalism and Japan and the EU Continental countries that harbor statist capitalism. It doesn't even follow that the variants are all trivial, showing which is the aim of the next two sub-sections. Even so, the key point remains: the differences within each group of industrial countries shouldn't be exaggerated. As you'll see, the countries in each group turn out clearly, with unequivocal force, to have much more in common with one another than they differ. And that includes their pivotal ability or not to adjust effectively to the forces of creative destruction in a period of turbulent changes in global capitalism.

Statist-Capitalisms

All statist-capitalisms are marked by highly developed regulatory and welfare-state systems, not to mention a very large public sector and high levels of government spending . . . to the point that political logic tends to dominate the interactions between states and markets in the EU-15 Continental countries and Japan.

That said, there are limited variants across the EU Continental countries: the levels of unionization differ, the degree of nationalized industries does too, and the roles of top bureaucrats compared with politicians varies too. For that matter, the lines between the public and private spheres are more blunted in France and Italy, say, than in Germany or Holland.

Japan and the EU

An even bigger difference separates the EU countries and Japan. Like the EU continental countries, Japan has a huge regulatory apparatus, and if anything, it controls over the domestic economy and its anti-competitive policies to protect the economic status quo --- including various subsidies and protective devices around unprofitable or uncompetitive industries and firms --- exceed those in West Europe. Some reforms have been made; there's been a little more openness to foreign manufacturing imports and multinational businesses; for the most part, though, the necessary reforms have all been shelved or watered down to a point of ineffectuality.

On the other hand, two differences separate Japan's statist-capitalism from the typical EU regulatory-and-welfare state. In particular, welfare expenditures are lower in Japan --- though this will change in a few years, what with the vast demands of ever more retirees living on state-financed pensions --- and overall government spending there as a percentage of GDP is lower too. Still, these differences have been blurring the last decade or so.

Welfare Spending

Take social welfare costs. They have risen rapidly the last few years, mainly to support the elderly and retired. For the fiscal year of 2004 alone, Japanese spending here rose 4.2%, and there's little reason to expect the rising pace to slow down over the next few years --- just the opposite. Since the early 1990s, spending on social welfare of various kinds is the only item in the Japanese government's annual budget that has risen noticeably other than the need to finance public bonds, all issued to support the huge governmental deficits that the country has run for a dozen years now . . . a point clarified in a moment.

More to the point, the Japanese government itself projects that social welfare spending will double over the next two decades . . . at a time when total public debt in Japan --- as we'll see momentarily --- is running at astonishingly high rates.

Governmental Spending

As for overall government expenditures, the following table shows the percentage of GDP that the government spends annually not only in Japan but the US, EU, and other industrial countries.


Public Debt

Which brings us to the high levels of Japan's total public debt, comparatively viewed: an astonishing 165% of GDP in 2004! Compare that with the 60-70% levels in the US and France and Germany: with Britain's is lower and Italy's much higher. The following table captures the unusually high levels of public debt in Japan and to an extent Italy. If you ask why Tokyo's deficit spending soared to such astronomical heights, the answer's simple: faced with growing stagnation in the country's economic growth after 1992 --- which has averaged less than 1.0% down through 2004 --- the Japanese government turned to one pump-priming measure after another in order to jump-start the economy onto a higher growth-rate path.

Total Public Debt As A Percentage of GDP In 2004

Untitled Document
  Britain France Germany Italy Japan USA
Public Debt % of GDP 39.9 67.7 65.8 105.6 165.0 65.0


Further Comparisons Between Japan and the EU, Plus Some With the US and Other Market-Oriented Countries

As the last few comments and tables show, Japan has much more in common with the statist-capitalisms in the EU than otherwise. To get a clearer idea of their similarities, shift your focus now to compare their statist-capitalisms with English-speaking countries' market-oriented capitalism.

Government Spending in Historical Perspective

First off, note how much the governments of state-capitalist countries have spent as a percentage of GDP between 1870 and the late 1990s:

Untitled Document
All Government Spending % of GDP
  1870 1920 1937 1960 1980 1990 1996
Canada n.a. n.a. 25.0 28.6 38.8 46.0 44.7
France 12.6 16.7 29.0 34.6 46.1 49.8 55.0
Germany 10.0 27.6 34.1 32.4 47.9 45.1 49.1
Italy 13.7 25.0 31.1 30.1 42.1 53.4 52.7
Sweden 5.7 10.9 16.5 31.0 60.1 59.1 64.2
UK 9.4 26.2 30.0 32.2 43.0 39.9 43.0
USA 7.3 12.1 19.7 27.0 31.4 32.8 32.4
Average 10.8 19.6 23.8 28.0 41.9 43.0 45.0

Source: Vito Tanzi and Ludger Schuknect Public Spending in the 20th Cen-
tury: A Global Perspective
(Cambridge Univ. Press, 2000), chapter I


A more revealing portrait of the trends in governmental spending over the last 45 years or so is brought out in the next two tables:

TOTAL GOVERNMENT SPENDING 1960-1996
Increase
Country 1960 1970 1980 1990 1996 1960-1996
Australia 21.2 25.5 34.0 37.7 37.5 16.3
Belgium 34.5 36.5 50.7 54.6 54.5 20.0
Canada 28.6 35.7 40.5 47.8 46.4 17.8
Denmark 24.8 40.2 56.2 58.6 60.8 36.0
Finland 26.6 31.3 36.6 46.8 59.4 32.8
France 34.6 38.9 46.1 49.9 54.7 20.1
Germany 32.4 38.6 48.3 45.7 56.0 23.6
Ireland 28.0 39.6 50.8 40.9 37.7 9.7
Italy 30.1 34.2 41.9 53.8 52.7 22.6
Japan 17.5 19.3 32.6 31.9 36.9 19.4
Netherlands 33.7 46.0 57.5 57.5 58.1 24.4
New Zealand 27.7 34.4 47.0 50.0 42.3 14.6
Spain 13.7 22.2 32.9 43.0 45.4 31.7
Sweden 31.0 43.7 61.6 60.8 66.1 35.1
Switzerland17.2 21.3 29.3 30.9 36.9 19.7
United Kingdom 32.2 39.2 44.9 42.3 43.7 11.5
United States 28.4 32.5 33.7 34.8 34.6 6.2
Average 27.0 33.3 42.8 46.3 48.0 21.0
a

Source: James Gwartney and Robert Lawson,
Economic Freedom in the
World 2001: Annual Report


A More Recent View

The previous table stopped in 1996. The following table brings the data forward for key countries to 2003, the last year when the information was available.

Total Government Spending % of GDP in 2003

Untitled Document
  Sweden France EU
Average
Italy Britain Canada Japan Australia Ireland USA
Total Government
Spending
59.0% 54.4% 48.4% 48.5% 42.8% 40.1% 38.3% 36.2% 35.2% 35.9%


What follows? Well, taking into account the data in the last three tables, let your attention refocus once more on some comparisons between . . .



The US and Japan Again



Despite Japan's rapid rise in governmental expenditures since the end of the 1980s, it still appears in these tables on government expenditure as something like an odd-man-out among statist capitalist countries --- not only compared to the EU average, but the head-turning levels of government spending in countries like Sweden and France. As we've noted, though, this gap will very likely continue to close in the next decade or two . . . not least, recall, because the Japanese government itself predicts that social welfare spending will double in the next two decades. All the same, leave aside the future. Even if you look at governmental spending in 2004 as a percentage of GDP, Japan's higher level than the US's , theLeave aside the futureFor that matter, a comparison with the US these days is particularly illuminating here.

Since the late 1980s, as the two recent tables show, total American government expenditures have more or less stabilized: the Federal government spends around 20% of GDP, and the rest is due to state and local governments. In Japan, there's been a huge spurt in all forms of government expenditure in Japan since the late 1980s (see the diagram above); and these days, total government spending there absorbs about 10% more of GDP there than here.

Even that 10% gap is understated.

The chief reason?

The US spends about four times as much percentage-wise on defense than Japan does; for that matter, if you include the supplemental spending for the Iraqi theater in the last two years, defense spending in the US rose rapidly after 9/11 from around 3.0% of GDP to about 5.0% . . . the main reason for the increase that you see between 1996 (in the first table) and 2003. For that matter, after 9/11, defense spending did rapidly increase, roughly from around 3.0% of GDP to 5.0% if you include the emergency supplemental funds for the Iraqi theater. Almost all the growth of governmental expenditures here since 1996 is a direct result of that increased defense spending. Taking all this into account, Japan's overall government's spending as a % of the civilian economy is closer to 20% more than the equivalent in the US.



Differences within the English-Speaking Market-Oriented Capitalism

So far, we've probed some of the differences within the state-capitalist countries --- especially Japan as opposed to the EU Continental ones --- and set out some comparisons between Japan and the US. Time now to note some of the differences among the market-oriented English-speaking countries.

Britain

Take Britain. As the tables on government expenditures reveal, the percentage of GDP that the government spends there has steadily fallen in the 1990s, the current level is still higher than Japan's in 2003. But note. The gap between the two countries on this score has narrowed markedly since the start of the 1980s . . . at the start of which decade Britain still had an intact advanced welfare-state similar to the EU Continental countries, only for much of the welfare apparatus to be reduced or reformed to bring it in line with the US's system of welfare as well as those that now prevail in Australia and New Zealand. Come to that, the latter two countries also began the same decade with an advanced welfare state; and like Britain in the Thatcher era, the governments in both of them undertook a huge pruning exercise of taxes and welfare-spending in order to reinvigorate their lagging economies. On the Japanese side, it entered the 1980s with the lowest percentage of governmental spending in GDP terms among all the industrial countries . . . only to move rapidly in the opposite direction by the decade's end.

Whether the British government will continue in the third term of Tony Blair's government --- Labour under his leadership, remember, just won the national election there --- isn't clear. What is clear is that since the start of the Thatcher-era reforms that Labour finally embraced when Blair entered power for the first time in 1997 has clearly reinvigorated its economy, compared to both its earlier post-WWII growth-record and the EU Continental countries.

Canada

Another odd-man-out is Canada. Starting in the 1980s and on into the early 1990s, its dominant Liberal Party governments rapidly expanded the public sector and various kinds of governmental expenditures . . . to the point that by 1992 or so it could no longer be classified as part of the English-speaking market-oriented countries, looking much more instead like a typical EU Continental regulatory-and-welfare state. As the stats for 2003 show, Canada's Liberal governments have managed since then to find ways to reduce its expenditures in percentage terms, but it still looks like an outlier at best in the market-oriented group . . . and most likely, if the Liberal Party continues to dominate Canadian politics the way it has since the early 1960s, the gap between it and the other English-speaking countries in matters of regulation, welfare spending, and other forms of public expenditures will likely persist, and maybe even expand...



 

Part Two:
WHICH COUNTRIES PERFORM BEST? ECONOMIC GROWTH IN STATE-CAPITALISMS VS. MARKET-ORIENTED ECONOMIES?


The Answer's Overwhelmingly Clear By Now: The Market-Oriented English-Speaking Countries

That's brought clearly in the table that follows immediately. It shows two big things: 1) how Britain, Australia, and New Zealand grew much faster after their severe cut-backs of the welfare state and government spending after 1980. And 2), more important still, how --- when you add in the US --- they have noticeably outperformed the state-capitalist countries of Japan and on the EU Continent.



GDP Growth Rates 1970-1980, 1980-1990, 1990-2003

Untitled Document
  1970-80 1980-1990- 1990-2003
Australia 3.3 3.4 3.8
Canada 3.3 3.2 3.3
Ireland 4.7 3.2 7.7
New Zealand 1.6 1.9 3.2
United Kingdom 1.9 3.2 2.7
USA 3.2 3.6 3.3
       
Japan 4.4 3.9 1.2
Euro-Zone Average 3.3 2.4 2.0
France 3.3 2.4 1.9
Germany 2.7 2.3 1.5
Italy 3.6 2.5 1.6
Sweden 1.9 2.5 2.3


A little more clarification about the performance of market-oriented countries that's captured in the table should prove illuminating. Take Ireland. Its big change toward a pro-business economy --- especially open to multinational investment --- occurred later in the 1980s, since which time its growth has soared . . . to the point that it moved from being one of the EU-15's three poorest economies to the richest in per capita income. It achieved this remarkable turnaround in less than 17 years. As for Canada --- which we noted earlier was something of a half-way house between the two models of capitalism --- it has also done better than the outright state-capitalist countries.

By contrast, all the statist-capitalisms have suffered waning economic vigor that's especially noticeably after 1990.

Same Results With Per Capita Income

The following diagram shows that the same results apply when the comparative standard shifts from GDP growth rates to the rate of growth in per capita income in the three decades after 1970, though for only the major countries: the US and the UK in the market-oriented group, and Japan, Germany, and France in the state-capitalist group.

Source: Taken directly from the McKinsey Global Institute

Unemployment in the Statist-Capitalisms and the Market-Oriented Countries

A similar outcome marks the ability of the English-speaking market-oriented countries to generate new jobs and keep unemployment at seemly levels. By contrast, aside from Japan, all the major EU Continental countries --- Germany, Italy, France, and Spain --- have performed at mediocre levels on this score too. Consider the following table. It brings out failure of the EU countries to generate new jobs, especially in the service sectors, compared to the US. The source for this table is Raquel Fonseca et al,
Entrepreneurship, Start-Up Costs, And Employment (Nov. 2000)

Note two key points in the data. First, 40 years ago, the US and the EU employed a similar percent of their populations. Since then, a tremendous gap has opened up between the two that is doubly surprising when you consider that women in both West Europe and the US flooded into the job market starting in the 1970s. Second, the major failures of the EU countries in generating new jobs are found entirely in the service sectors of the private economy: not just those labeled as such, but also in finance and retail and wholesale businesses. As the three EU scholars whose data prof bug has drawn on note, these failures in turn derive almost entirely from a lack of entrepreneurship in those sectors.

Untitled Document Employment By Sector in the EU and USA In 1998, Percent of Working Population
  EU USA
Total Percentage of Work-Age Employed 1965 65.0 65.0
Total Percentage of Work-Age Employed 1998 61.0 75.0
Agriculture 3.0 2.0
Manufacturing 17.8 17.7
Services 37.9 54.3
Distribution 11.6 17.5
Transport 3.6 4.1
Finance 6.7 11.2
Public Sector 17.8 21.4
Non-Employed 39.5 26.0
 


What follows from a mediocre performance by the EU Continental countries in creating jobs? The answer: growing long-term structural uemployment at levels in 2005 that the US hasn't seen since the Great Depression era of the 1930s.

Untitled Document
Unemployment Rates in Selected Countries 2005
  USA Canada Australia Britain Japan France Germany Italy Sweden
April
2005
5.2 6.1 5.1 4.8 4.5 10.2 12.0 10.0 6.3
Source: US Bureau of Labor and latest newspaper reports


The problems of rising unemployment and lagging job-creation in the EU aren't new, just the contrary. Here is a decade-long look at its performance compared with the US's between 1994 and into 2005:

US and EU Unemployment Rates 1994-2005

Sources: Eurostat and Newspaper Updates for 2005


The problems of unemployment don't fall evenly across the EU populations, just the opposite. They are particularly hard on young people, age 16-24, seeking to enter the job market, and on women. For that matter, what is especially surprising is the low percentage of EU people in their fifties and early sixties who aren't working at all! The following table, taken from US Bureau of Labor study directly, brings this all out clearly:

Employment By Age and Gender

Source: US Bureau of Labor

Japan's Official Low Unemployment Rate: Is It Accurate?

Japan's low unemployment rate needs to be clarified, especially in the light of its poor growth performance for 13 years now. Since the end of 1992, after all, its GDP growth rate has barely averaged 1.0%, and the country has hovered in or near recession for about half that time. How reliable then are Japanese official figures for its unemployment rate? The answer is that for decades now, both Japanese and foreign specialists have queried the accuracy of those figures. The following three sets of comments bring out the main reasons for doubts on that score.

(i) As one specialist noted, Japan's "official unemployment rate is also biased downward because the Japanese government offers employment-adjustment subsidies" to companies that maintain employees as ‘window sitters' The quote is of an unpublished paper that appears in a published study by Benjamin Powell, "Explaining Japan's Recession", which can be found
here.

(ii.) There's a more important problem in comparing Japanese unemployment rates with those of the market-oriented countries or even the EU-Continental countries: tersely put, the participation ratio of the population in the Japanese work force is artificially kept low because women in Japan --- once married --- are not supposed to work. It is culturally frowned on, and the group pressures in Japan to adhere to that norm are intense and pervasive. That doesn't mean that Japanese married women might not want to work; but as long as these cultural pressures remain intact, they are overwhelmingly kept out of the work force.

For those who wish to pursue this topic, see an outstanding paper by Gennadi Kazakevitch, "Once Again on Interregional, International, and Cross-Age Comparison of Unemployment", a pdf file that you can download here . Kazakevitch, an Australian economist, applies a very interesting model to show what the actual results of unemployment would be in both Australia and Japan if the two countries used one another's participation ratios for 1997. The surprising changes are captured in the following diagram taken directly from Kazakevitch's paper, and all references to it should be strictly to the original.

Conventional Unemployment Rate Vs. Unemployment Measured at the Other Country's Participation Rate in Australia and Japan

Part Three:
WHAT AILS THE STATIST CAPITALIST COUNTRIES?


Things Have Grown Worse For Them In This Decade

The previous table and graph, revealing as they are, have one big drawback when it comes to underscoring the waning economic vigor and competitiveness of the statist-capitalist countries: in a word, they don't show clearly how their problems on this score have multiplied since the start of the current decade. The following table seeks to correct this drawback (the * and ** listed for the years 2005 and 2006 are based on the latest estimates).



Government Debt and GDP Growth 2001-2006 Untitled Document
  Average Gov. Debt % of GDP 2001-2004 Average GDP Annual Growth 2002-2005* Estimated GDP Growth 2006 **
USA 2.8% 3.3% 3.2%
Japan 6.4% 1.2% 1.9%
Germany 3.4% 0.6% 1.5%
France 3.8% 1.5% 2.1%
Italy 3.6% 0.5% 1.5%
Britain 1.9% 2.4% 2.2%


Note two things in particular. 1) Not only has Japan continued to stagnate in the current decade, so too have the big EU Continental countries after 2001--- Italy, Germany, and France. And yet, 2), their deficit spending has increased rapidly since then, more so or as much as the US's, but --- the pivotal point --- without the big stimulus to US economic growth that followed here.

All of which prompts a key question:

What Explains the Failure of Large Deficit Spending to Spark Renewed GDP Growth in
the EU and Japan?




One thing or sure: not inadequate macroeconomic stimuli, whether fiscal or monetary

Yes, that's clear enough by now. Take monetary policy. For all the complaints voiced in the EU about interest rates set by the new Eurobank, the failure to reignite solid economic growth can't be due to sufficiently low interest rates there --- or for that matter Japan. Japan's interest rates have been at an all-time low for almost a decade now, with little in the way of economic stimulus to show for the huge run-up of public debt. As for the EU, interest rates have been only a tick higher than in the US--- and even here, remember, what had been the lowest interest rates in the US in decades didn't suffice in to rejuvenate GDP growth at anything like the real rate of growth that we've experienced since the end of 2001. Instead, the big fiscal boosts that followed in this country --- a combination of tax cuts and increased defense spending --- did what standard Keynesian macro-economics suggested they would if an economy is dislocated and in a recession: they led to a big spurt of US economic growth.

Well, then, did the EU countries lack similar fiscal policy boosts? No, on the contrary. As you can see from the above table, deficit spending in the big three EU countries on the Continent had no such simulative impact whatsoever. (The same is true of Portugal, except that its deficit spending this year is over 6.0% of GDP.) Instead, unemployment throughout almost all the EU has continued to grow --- it's around 10% on an average today --- and around 12% in Germany, the largest economy. In France, it's above 10.0% and growing worse, and Italy's unemployment rate is not far behind.

 

What about the euro and its exchange rate?

Many West Europeans seek to locate the culprit for their mediocre growth performance since 2001 in its rise in dollar terms starting in 2002. Introduced in 1999 at an exchange rate of 1.18 euro/$US, the euro fell by the end of 2001 to $0.85 --- a huge fall of over 33%. By the summer of 2004, it had risen to over 1.31 euro/$US --- an equally big rise. But note: Last year, Germany mopped up its largest trade surplus ever on a global basis, yet its overall GDP growth was mediocre, less than 1.0%. All that growth, moreover, derived directly from that trade surplus/ As for the rest of the EU countries, domestic demand in the private economy --- consumption and business investment --- also lagged as in Germany; and most of the little growth these other EU members achieved was due in large part to trade with the outside world as well. (For what it's worth, right now --- late May 2005 --- the euro is about 6% above its initial dollar rate in 1999; nothing greater.

So We're Back To Our Key Question:

If fiscal, monetary, and exchange-rate policies can't account for the EU's mediocre performance in this decade, what does explain it? The answer isn't a matter of macro-economic policy that governments and central banks can largely control, nor a matter of the exchange rate of the euro. Rather,

The EU's chief problems are much more structural and built into the economies of Japan and the EU-Continental countries. They lie in economic institutions and policies and the ways in which the public and private sectors interact and the balance between them: in other words, the fault lies in their statist-capitalisms.

Specifically, to make sense of what's happened not just to the EU Continental countries but the other big statist-capitalism in the industrial world, Japan, we need to probe the inherent . . .

. . . Logic of Politics vs. the Logic of Markets in Statist Capitalisms

Talking about the logic of behavior and policymaking by key agents in the political and economic realms brings us to the core of the problem --- in effect, the greatest differences that separate the market-oriented countries from those that adhere to statist-capitalism.

At bottom, whatever the variants of state-capitalism, the logic of politics trumps the logic of markets in economic policymaking, and political calculations, and political maneuverings tend to overwhelm market incentives and market adjustments to fast-moving changes in the economic environment, whether domestically or internationally. It doesn't matter whether the causes of those changes are revolutionary technologies or full-speed-ahead globalizing forces or the emergence of new, low-wage industrial rivals in Asia whose firms can work effectively with all but the most advanced of those radically restructuring technologies. Whatever their nature, these changes are generally blunted or fully offset by political maneuverings to protect the prevailing economic status quo.

Seen from that angle, to return to Japan, its statist capitalism hardly differs from that found on the Continent of West Europe. There, as in Germany under Gerhard Schroeder or in France under Prime Minister Rafferin since 2003 or Italy in the Berlusconi era, one reform-minded LDP Prime Minister after another has proclaimed his bursting desire to finally reform and restructure Japanese capitalism --- only to retreat at almost the first sign of hostile public opinion or major grumblings within is own party's parliamentary ranks. And hostility and grumblings are all-pervasive in the EU these days.

Small wonder

Both political timidity and the ideological bent of the dominant EU media have combined to convince more and more of the worried EU populations --- confronted not just with the challenges of global capitalism and big shifts in economic dynamism, but growing crime and violence these days on the streets of European cities and the ever increasingly numbers of alienated Muslim populations --- that some how, some way, their existing economic and social benefits can be sheltered from all these challenges by the right kinds of political leadership and governmental policies that follow. And "right" in these circumstances means, in effect, a sleep-walking retreat from relentlessly powerful realities into self-delusion: If only the electorates could find new and more sensitive elites to run their statist-capitalisms, they'll be able to continue to have 10-12 weeks of vacation and public holidays a year and ever shorter work-weeks; continue to hold the same job in the same firm in the same locality life-long; continue to get full welfare benefits without more and more of their incomes going into taxes; continue to have their salaries and wages rise yearly; and continue to enjoy full retirement benefits --- financed by taxes --- when they reach retirement at a time when their native European populations are shrinking and fewer and fewer Europeans between the age of 18 and 65 actually work. If only; if only; if only . . .

Yes, small wonder for all the hostility and grumblings in public opinion and during elections.

The EU populations, it turns out, want someone to ward off all those threatening political, economic, and social forces that have been unleashed both inside and outside their countries the last decade or so . . . the build-up of these threats smothered and concealed, year-in, year-out, in a greasy pommade of political reassurance voiced by mainstream politicians and of multicultural and other politically correct nostrums that pass for conventional wisdom in almost all the EU media. The pommade has begun to melt now. The threats and dangers are everywhere. And when the existing governments turn out to be unable or unwilling to provide such a sheltered existence where no sacrifices of a major sort have to be made by their populations, the electorates simply rebel and throw them out. Or, in the case of the French referendum on the new EU Constitution --- an act to be repeated soon in Holland --- defy what their betters tell them they should do.

The Net Effect?

Its on display almost everywhere in Japan and the EU continental countries.

Instead of a sustained attack on the hillocks and tiny mountains of market inefficiencies that have piled up for decades in their economies, reform-minded governments in Japan and the EU have dug a little here and there around the low slopes with a relaxation of this regulation or that, or this welfare payment or that; but nothing more. Nothing anyway that approximates the major excavation job needed for a good decade or two to dig their economies' out of their self-defeating economic and political excesses. The consequences of any full-tilt excavation-job are just too scary and unnerving.

No surprise, then, that it's almost impossible to find a major politician anywhere on the EU Continent who's willing to tell the truth to his people on this score --- now or in the past. In Japan, a handful of prominent politicians have actually been more forthright in their rhetoric, but they too --- when in power --- have shied away from a full-scale overhaul of their stagnating economy's dysfunctional institutions and policies. Instead, the political motto in Japan and the EU alike is as it's always been: Trust us, We know best; that's why we have such a powerful role in your daily lives. Progress is in the pipelines; improvement's only a matter of time. One more reform, and life will be back to normal. For all the harum-scarum giddy rhetoric, the trust has been crumbling with gathering force the last couple of years. The populations no longer swallow it. Consensus politics may still be strong in Finland and Sweden, but those seem to be the only two EU Continental countries where that's the case. The Danish people are tired of it; the Dutch no less so; the Belgians --- with a 13% unemployment rate --- ditto. Even the Norwegians and Swiss --- not in the EU --- have tossed out consensual governments in favor of right-wing populist parties, either in coalition-government or as the dominant member.

And that's not the worst of it.

There are other reasons for outside observers to worry about the future of the state-capitalist countries. Wittingly or not, at any rate in the EU --- Japan's population, by contrast, seems resigned to continued stagnation and decline --- political cowardice and evasive windmill rhetoric in mainstream political circles have contributed to the age-old European reflex of scapegoating others for their troubles: these days, Jews, the USA, and globalization . . . the three increasingly jumbled together in EU populist rhetoric, on both the left and right. (On the surging anti-Semitism in European life, see the four-article buggy series --- complete with lots of survey data --- that appeared in late 2003 and early 2004. Click
here for a good entry-point.)

Note the irony here.

Whenever these populist backlashes are given vent --- as in the recent French veto of the EU Constitution in the May 29th referendum --- mainstream political and bureaucratic elites on both the governmental and EU regional levels can only express dismay at these rebellions and the defiance of their betters that they manifest. What's gone on? Why are our countrymen so sour? Alas, no great powers of divination are needed to guess which social movements and political parties are likely to be the major beneficiaries, on both the far left and the far right, of such temerity in governing circles.

Parts Four and Five Will Be Continued in the Follow-Up Article, To Be Published Soon.