Thursday, December 11, 2008

New battle for commanding heights

Business Times - 12 Dec 2008


These days, with huge industry bailouts, it seems the US is following in the economic footsteps of Russia and China

By LEON HADAR
WASHINGTON CORRESPONDENT

DURING the height of the globalisation era of the 1990s, political economists Daniel Yergin and Joseph Stanislaw, published The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World, a treatise on the relationship between the government and the marketplace which became an instant best-seller and was turned into a documentary.

Taking the title from a 1922 speech by the founding father of the Soviet Union, Vladimir Lenin - who used the phrase 'commanding heights' to refer to industries in an economy that effectively control and support the others, such as oil, railroads, banking and steel - the authors defined globalisation as a period in economic history when free markets predominate, and governments relinquish control over the 'commanding heights' and place few, if any, limits on imports, exports, immigration and exchanges of information.

Reflecting the political Zeitgeist of the 1990s, Messrs Yergin and Stanislaw explained that during the first part of the 20th century and against the backdrop of the Great Depressions, ideological movements like communism, fascism and socialism - which advocated central planning by government to replace the free market as the main instrument of running the economy - were winning the hearts and minds of the intellectual and political elites worldwide. This happened in the West as well where it had given rise to the welfare state and various forms of government regulation of the economy.

But in response to signs of economic stagnation in North America and Western Europe in the 1970s, the tide began to turn. Margaret Thatcher and Ronald Reagan presided over an extraordinary effort to challenge the basic assumptions of the welfare state and to introduce competition, deregulation, openness and privatisation - ideas that become accepted in other parts of the world during the 1990s. Capitalism was taking over the commanding heights.

Yes, those were the days . . . But one should recall that while the marketplace clearly won the intellectual and policy battles during the 1990s, and the Anglo-Saxon model of capitalism became a model for many economies, governments continued to play a central role in some of the capitalist economies of East Asia, and especially in Japan and South Korea, and in Germany and France.

Indeed, some American economists such as Clyde Prestowitz, director of the Washington-based Economic Strategy Institute (ESI), warned that unless the US embraced industrial policy as a way of guiding and protecting private industry as part of a strategy to compete in the global economy, the American economy would be left behind those of Japan and Germany.

But the economic stagnation in Japan and the high jobless rates in Western Europe just as the American economy was experiencing the boom of the 1990s that was driven by Wall Street and Silicon Valley seemed to be making the calls by Mr Prestowitz and other proponents of industrial policy and 'managed' trade seem so, so passe.

Indeed, it was a time when politicians and government officials were scorned by the pundits. Washington was regarded as a problem, not a solution. The best and brightest were migrating to Wall Street and hedge fund managers were being idolised by the media.

The financial markets knew best and all we needed was to make sure that regulators in Washington didn't get in their way to creating wealth. And only global economic competition, not government protection, would make it possible for American manufacturing, including its auto industry, to win more market share.

Americans were preaching the virtues of minimal government to officials and business executives in East Asia, Europe and Latin America during the last decade or two. Moreover, Washington even ended up threatening economic sanctions and retaliation, if governments in East Asia provided financial support to their, say, auto industries.

After all, Washington would declare, you guys have to allow the forces of the free market, including competition from abroad, to determine the fate of your car manufacturers. Take it from the US - that's the way the free market works.

Well, it seems that this kind of rhetoric may sound a bit passe in Washington these days as the Democratic-controlled Congress and the Republican White House, with the full support of President-elect Barack Obama, are close to agreeing on the terms of a US$15 billion government rescue of the American automobile industry that would be directed by an appointee of President George W Bush - or a 'Car Czar' - and would impose federal oversight of the auto companies.

The Commanding Heights, here we come!

Indeed, Mr Obama and his aides seem to imply that under the new president, Washington is going to be in the business of, well, making cars, and that the Car Czar will end up leading a major restructuring of the American auto industry, including by imposing mileage and environmental standards, not to mention making other decisions on investment, salaries, etc. In short, the kind of industrial policy that American officials were decrying just a few years ago.

But you don't have to be a fan of Milton Friedman or Friedrich Hayek to express a certain scepticism about the notion that Government Knows Best when it comes to the economy. The marketplace may not be perfect, but government bureaucrats who pick and choose economic winners and losers based on short-term political considerations and pressures from interest groups cannot be expected to produce business success stories.

While the Detroit bailout is described as a necessary and temporary step in the context of an economic 'emergency', you don't have to be Nostradamus to predict that the temporary would become the permanent: that the Car Czar would gradually expand into a large government bureaucracy that dispenses more money and sets more directives for the car industry.

And before you know, other industries would be lobbying Washington for assistance and guidance. Hey, why shouldn't American newspapers that seem to be facing extinction and on which so many workers are dependent (journalists, printers, delivery men, etc) have their own Czar?

The American economy has been on this slippery slope of government intervention in the economy since the start of the financial crisis, with huge segments of the financial sectors being 'saved' by Washington (or not being saved, like in the case of Lehman Brothers) as part of a process that doesn't seem to suggest that officials in Washington know what exactly they are doing.

Hence, the US$700 billion bailout that was supposed to be used to purchase 'toxic' assets and is now being handed out to troubled banks, insurance companies, loan services and credit companies. It was not surprising that following in the footsteps of AIG, Detroit's Big Three showed up in Washington, arguing that they are 'too big' to fail and want the government to also bail them out.

It's clearly going to become very difficult for American officials and pundits to continue blasting Russia for its economic nationalist policies or call on China to accelerate the deregulation of its economy. Indeed, these days, it sometimes looks as though the Americans are following in the economic footsteps of the Russians and the Chinese.

David Boaz, vice-president of the pro-free market Cato Institute in Washington, recalls that during the days of the Cold War, pundits used to talk about how the conflict between capitalism and communism would end with the 'convergence' of the two systems, 'blending the personal freedom and profit motive of Western democracies with the communist system's government control of the economy', as one scholar put it then.

As we know, that didn't happen and, instead, communism failed, and the communist countries moved rapidly towards capitalism. 'But then came the Bush-Obama era,' Mr Boaz notes, pointing to a report in The New York Times that appeared in the same week that Congress and the administration were figuring how to bail out (nationalise) the auto industry, suggesting that 'the Kremlin seems to be capitalising on the economic crisis, exploiting the opportunity to establish more control over financially weakened industries that it has long coveted'.

That's a little too close for comfort, Mr Boaz concludes.


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