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Six Ways Out of an Economic Crisis

How can industrialized countries best pursue economic reform?

August 20, 2004

How can industrialized countries best pursue economic reform?

Looking at the industrialized nations, it is possible to distinguish six prototypes of crisis management over the last 30 years.

The British model under Margaret Thatcher relied on a pure strategy of conflict. The goal was to smash special interests — notably those involving the trade unions.

This policy was intended to restore to companies the freedom they needed to act decisively. The state was expected to perform the necessary reforms to the welfare systems and the public sector. As a result, Britain today still enjoys much faster growth than the European continent.

The disadvantages were a sharp polarization of society, coupled with a deindustrialization of the economy — and a deterioration of public infrastructure.

The American model, as shaped under President Ronald Reagan, was based on giving U.S. society hope, pride and confidence in its own capabilities following the difficult years of the Vietnam War, the collapse of Bretton Woods and the sharp rise in oil prices in the 1970s.

To underpin this optimism, Mr. Reagan also embarked on a strategy of conflict with unusual firmness and consistency — as borne out in his crushing the air traffic controllers’ strike, to name just one instance. Reaganomics laid the foundation for the dynamism of the new economy and the longevity of the economic upswing during the nineties.

The disadvantages were volatile exchange rates, coupled with very high budget deficits and occasional interventions in the global free trade system. Those deficits are still being felt today in the high level of total debt.

The Swedish model was, for the most part, a state-run repair job. It aimed at consolidating government finances, revamping the pension system, reducing welfare to an affordable level — and pursuing a very active education policy.

This was made possible politically because all groups of society had recognized that the "cradle-to-grave" welfare state could not continue in the same way indefinitely.

Sweden was transformed from a welfare state to a dynamic market economy again — gaining a leading position in information technology in the process. The danger is that the model will come adrift once the necessary underlying consensus in society is no longer there. This is precisely what happened in the Netherlands.

The Dutch model was built on an agreement between management and labor — exchanging pay-constraint for better working conditions and shorter working hours.

The government supported the agreement by using the gains in economic growth to cut taxes — and thus to alleviate the position of workers accepting lower pay increases.

For a long time, the so-called "polder model" was celebrated as a kind of third way out of mass unemployment. But it only worked as long as the parties involved remained convinced of the necessity. The downturn in the Dutch economy since the successes of the 1990s has led many to conclude that the model has failed.

The reform impulse in the Japanese model emanated from industry rather than the state or management and labor.

In the difficult years of low growth and deflation, companies started to tap the Chinese market, boost their international competitiveness and improve their balance sheets and enhance earnings — which put them in a position to increase employment.

Japanese exports are rising at a rate of 15% in 2004 — compared with 8% in the already export-heavy German economy.
As a result, Japan currently enjoys the fastest economic growth of any industrialized nation. Deflation is coming to an end. The adjustment has taken a long time though — more than ten years after the bubble burst.

The approach to reforms that has been taken by Germany is best characterized as a mix of all the other models described above.

Germany has adopted parts of the Dutch and Swedish models, which emphasize cooperation and agreement between labor and management. But this approach only got Germany so far in giving its companies more flexibility.

More recently, relations between labor and management (as well as the government) have become quite antagonistic, for example at DaimlerChrysler and Siemens. This approach is more reminiscent of the tactics used in the British and U.S. models, albeit in a — yet — much tamer form.

And lastly, Germany is also exhibiting some traits of the Japanese models. Despite unfavorable economic conditions at home, many German industrial companies are fierce competitors on the global stage. They have secured their success by tapping into new markets abroad and continued success in exporting goods to the rest of the world.