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A Lesson from the South for Fiscal Policy in the US and Other Advanced Countries

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  • Frankel, Jeffrey A.
Abstract
Two decades ago, many people had drawn a lesson from the 1980s: Japan's variant of capitalism was the best model. Other countries around the world should and would follow it. Japan's admired institutions included relationship banking, keiretsu, bonus compensation for workers, lifetime employment, consensus building, strategic trade policy, administrative guidance, pro-saving policies, and corporate goals of maximizing companies’ industrial capacity or market share. These features were viewed as elements of Japanese economic success that were potentially worthy of emulation. The Japanese model quickly lost its luster in the 1990s, however, when the stock market and real estate market crashed, followed by many years of severe stagnation in the real economy. A decade ago, many thought that the lesson of the 1990s had been that the United States’ variant of capitalism was the best model, and that other countries should and would follow. The touted institutions included arms-length banking, competition for corporate control, Anglo-American securities markets, reliance on accounting firms and rating agencies, derivatives, bonus-compensation for executives, an adversarial legal system, deregulation, pro-consumer credit policies, and corporate goals of maximizing companies’ profits or share price. These features were viewed as elements of US economic success and potentially worthy of emulation. The American model quickly lost its attractiveness in the 2000s, however, when the stock market and real estate market crashed. Poor economic performance left per capita income and median household income below their levels of 2000 – even before the severe US-originated recession of 2008–2009.2 "Where should countries look now, for models of economic success to emulate?" Perhaps they should look to the periphery of the world economy. Some smaller and less-rich countries have experimented with policies and institutions that could usefully be adopted by others. Singapore achieved rich country status with a unique development strategy. Among its many innovations was a paternalistic approach to saving. Costa Rica in Central America and Mauritius in Africa are each conspicuous performance standouts in their respective regions. Among many other decisions that worked out well, both countries have foregone a standing army. The result in both cases has been histories with no coups and with financial savings that could be used for education and other good things. Slovakia and Estonia in Central/Eastern Europe have simplified their tax systems by means of a flat tax. Some of the lessons from emerging market countries can be useful for the big advanced countries. Two illustrations from microeconomics: First, Singapore pioneered the use of the price mechanism to reduce traffic congestion in its urban center. London emulated Singapore when it successfully adopted congestion pricing in 2003; other big cities should do the same. Second, Mexico pioneered Conditional Cash Transfers (CCT). CCT programs, which make poverty benefits contingent on children's school attendance, have been emulated in many countries, and embraced even in New York City. Some emerging market and developing countries also have lessons for the United States in areas of macroeconomics, specifically regarding the cyclicality of fiscal policy. To state the message of this paper most succinctly, over the last decade countries from Chile to China learned how to run properly countercyclical fiscal policy: taking advantage of boom periods such as 2003–2008 to achieve high national savings, and in particular to run budget surpluses, which then allows some fiscal ease in response to downturns such as 2008–2009. During this same period, advanced countries such as the United States and United Kingdom forgot how to run countercyclical fiscal policy. Perhaps the ‘leaders’ could look to the ‘followers’ for some tips on how to get back on track.

Suggested Citation

  • Frankel, Jeffrey A., 2011. "A Lesson from the South for Fiscal Policy in the US and Other Advanced Countries," Scholarly Articles 8705907, Harvard Kennedy School of Government.
    • Handle: RePEc:hrv:hksfac:8705907
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean

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