Looking for models in pursuit of prosperity

Kumiharu Shigehara,
Head, International Economic Policy Studies Group.
Formerly Chief Economist (1992-1997)
and Deputy Secretary-General (1997-1999) of the OECD,
and previously Chief Economist of the Bank of Japan
Published on: March 06, 2003


Do not underestimate some of the economic and political achievements of the last few decades. And do not overestimate some of the present transformations either. In the search for stability and prosperity, there is much to learn and no country has all the answers.

Looking at the economic difficulties of Europe and Japan these days, it is all too easy to forget some basic historical truths: in particular, that over the last forty years, western Europe and Japan have achieved unprecedented economic prosperity, and that their progress followed two devastating and debilitating world wars. Anyone that witnessed the flattened cities of Dresden or Hiroshima must never have imagined the recovery that was to follow. Within two short decades Japan and the former West Germany had established themselves as the second and the third industrial powers after the United States.
How did these so-called economic miracles come about? One reason was a sheer lack of choice. Deprived of military power to secure export markets and access to natural resources abroad after defeat, the onus fell on their well-educated workers, business managers, bankers and an eager new state to achieve results. True, they were helped in these efforts by post-war international trade liberalisation and a generally favourable external climate, but it was by working together and targetting high value-added products, from automotive goods to science and technology, that high economic performance and social progress became possible. In effect, West Germany and Japan each forged their own market-based economic models whose efficiency and social equity were exemplary of how free market economies could succeed in the face of centrally commanded economies in the Cold War period.
This does not mean that the international relationships of free market economies were always smooth. In the 1960s, expenditure increases associated with the Vietnam War and increased inflationary pressure in the United States started gradually to undermine the gold and foreign exchange system with the US dollar as the primary reserve currency. The shift from the fixed exchange rates of Bretton Woods to the floating rate system introduced for major currencies in 1973 strengthened the capacity of free market economies to absorb external shocks. Indeed, had the floating rate system not been in place, the economic management of countries highly dependent on imported oil would have been disrupted far more by the two oil crises of the 1970s than it actually was. However, floating currencies did not provide a panacea for curing imbalances in external payments, nor could it free domestic economic policy from external constraints. Flexible rates have sometimes moved in abrupt and erratic ways that were difficult to explain in normal economic terms. Sustained misalignments upset the allocation of productive resources across free market economies and fuelled protectionist sentiment in deficits countries, notably the United States.
This caused particular concern in the late 1970s and 1980s as both Japan and West Germany each ran persistent surpluses. These imbalances became subject to both bilateral and multilateral surveillance. However, uncertainties about the balance-of-payments effects of domestic demand and exchange rate changes as well as failures of various attempts, including those by the IMF and the OECD, to identify precisely the equilibrium levels of exchange rates left room for ad hoc arrangements and at times unhelpful political intervention.
We still face this core challenge today: how and on what basis to bring large global economies together so that they might manage their affairs in "mutual self-interest". Bilateral co-operation, multilateral co-ordination, unilateralism, independence: all these are possible, and not necessarily in mutually exclusive ways.