Can Putin Survive?
The Lessons of the Soviet Collapse
Professor Krugman has trained his sights on fellow economists and the political leaders they have influenced. To embrace skepticism and enlighten is the duty of a scientist, and Krugman does both. Politicians should not rely on explanations that give only one cause. In particular, theories that equate complex national economies with companies should be viewed with caution, especially if the emphasis on competition leads to a downgrading of social and environmental standards and coordinated economic policy.
It can be demonstrated that the level of prosperity of national economies depends to a large extent on the productivity and to a lesser extent on the international competitiveness of their companies. Because of its greater dependence on world markets, Germany is in a different situation than the United States. Germany's integration in the world economy has increased rapidly over the past decade. In addition, Germany is confronted with the singular problem of transforming the German Democratic Republic, a highly unproductive economy that was completely sealed off from international competition, into a productive market economy with open borders.
Nevertheless, Krugman suggests that even for a country as highly involved in foreign trade as Germany, the heavy burden of public debt, taxes and levies, and the thicket of regulations now pose a problem for investors and future productivity gains. Levies and regulations in Germany have reached such dimensions that they have a much greater impact than any adverse action by Japanese or American politicians.
In Germany as in any other country, those who follow the fashion of using international competitiveness to explain every economic problem risk making mistakes. The result is a waste of tax money or, worse, calls for closing borders. Even now, national economies are competing to cut taxes and offer industrial subsidies to increase investment and ease overheads, thus distorting market conditions. The result is rising public debt. At least this consequence has been the experience of the United States, which initiated the tax-cutting contest during the Reagan years.
Moreover, as a result of the global deregulation of the banking sector, an alarming trend has emerged. The money economy has taken on a life of its own. Government tax-cutting contests have produced a global market of tax evasion for financial assets. By comparison, investments in tangible fixed assets appear less profitable than making money directly with money, without taking the detour of producing goods. This shift in profit expectations is a major cause of increasing underemployment in many industrialized nations. It is a case of politically misdirected capital.
In the contest for attracting or holding onto international companies, many governments are also cutting environmental regulations, which is detrimental to the future availability of natural factors of production. Of course, another result of this unfair competition is that the minimum social standards of the International Labour Organisation can be ignored with impunity.
The General Agreement on Tariffs and Trade had good reason to discuss environmental standards and free trade: to import goods from countries that are competitive only because they offer global resources free of charge has little to do with comparative cost advantages.
The ability of national economies to apply policy controls decreases with their interdependence with other economies. This becomes patently clear in fiscal policy when imports account for a high share of gnp. In these cases, it is questionable whether an expansive fiscal policy will stimulate domestic demand and generate additional tax revenues. Competing countries will delay their own stimulus until the former country has incurred the costs. The consequence of these waiting contests is clear: recessions in the world economy last longer than they would with a coordinated approach.
Since World War II, it has been common practice among the Western industrialized nations to avoid devaluation contests, and for good reason: such contests are harmful. They lead to beggar-thy-neighbor policies, extremely high public debt, consumption of resources and mass unemployment. Consequently, the public will no longer approve of an open world economy.
Competition requires rules; otherwise it will destroy itself. Competition without rules is unfair. For this reason, binding antitrust legislation has been adopted in the European Union. German politicians are in favor of strengthening the institutions of the European Union; and at least Germany's Social Democrats support the attempts made by European Commission President Jacques Delors to broaden the scope of fiscal and monetary policy for the highly integrated European economic area. Some conservative governments do not want to go beyond the creation of a single European market. Instead of coordinating economic policies multilaterally, they want the national economies to compete with one another in monetary and tax policies as well as in environmental and social standards. The potential winner of this competition is clear: internationally mobile capital. The likely loser is equally clear: the national economies. Krugman is right to warn that the exaggerated importance attached to competitiveness may lead to protectionism with all its prosperity-consuming evils.
There are many good reasons for promoting research and development, education and training, as well as technology at the national level to provide for future growth and employment at home. And one country can certainly learn from another how to increase productivity. However aggressive stances are not needed. If Krugman's article leads to a realization among political decision-makers that defining countries primarily as economic competitors is a mistake, it should result in greater international cooperation and policy coordination.
Rules are needed that do not completely preclude but nonetheless restrain unfair competition, among currencies, tax systems, industrial policy interventions as well as environmental and social standards. The world economic summits as well as informal meetings of the Group of Seven industrialized nations should regain the substance that they had in German Chancellor Helmut Schmidt's time. In view of the present global challenge, which all countries face in coping with structural change in a socially acceptable and ecologically sustainable manner, the industrialized nations must cooperate more closely, not only among themselves but with the developing countries.