The Limits of Doctrine

WILLIAM PFAFF

April 13, 1992|By WILLIAM PFAFF

PARIS. — Paris -- The presidential primaries in the United States, like the election campaign just finished in Britain, have posed an important debate on the role of the state in the economy. For the past 15 years monetarist and supply-side market economic doctrine has dominated economic policy-making in the United States and Britain.

If the two countries move now to a more interventionist approach, and increase public infrastructure investment, this can have an important international effect. The other major West European governments and Japan already practice a degree of state economic intervention condemned by Reaganite and Thatcherite theorists and politicians. As these countries today have the more successful economies, the intellectual battle is being won on the playing field -- or shall we say, in the marketplace.

You would think it common sense that good public health and education, and roads, railroads and other forms of public infrastructure, unprofitable in themselves, nonetheless generate wealth indirectly. A recent U.S. study concludes that industrial productivity growth was highest from 1960 to 1973 in exactly those countries which had the highest rate of non-military public infrastructure investment: Japan, West Germany, France.

From 1974 to 1989, the overall correlation was less marked, but the United States had the lowest percentage of gross national product spent on public investment and the lowest level of productivity increase. Alan Aschauer (in the Journal of Monetary Economics), says that global U.S. productivity (labor plus capital) grew by 2 percent annually in the 1950s and 1960s but only by 0.8 percent in the 1970s and early 1980s. At the same time growth in non-military public investment fell from 4.1 percent to 1.6 percent. He sees cause and effect in this.

An economist at the French national statistical institute argues that a direct relationship also exists between productivity and the level of skilled labor employed in industry. The tenth of French industry that employs the highest level of unskilled labor is the least productive. The tenth employing the most highly qualified labor is the most productive. Education and training equal productivity.

All this is why Germany is investing so heavily in public infrastructure in East Germany, and why investment in education is so high in most of Europe and in Japan. The U.S. and Britain, however, have for more than a decade neglected highways, railways and airports, insisting that whatever industry needed the market would motivate industry to build. Britain still has not even begun to build the rail line for high-speed traffic on its side of the Channel Tunnel.

Market doctrine has also held that privatization in Eastern Europe and the ex-Soviet Union would cause market forces to revitalize economies and generate growth. However, growth is slow in coming. It is relatively easy to privatize commerce -- shops, restaurants, etc. The main streets of Moscow now are lined with people buying and selling. But they are not producing. Productive enterprises are hard to privatize when obsolete and unproductive plants produce goods uncompetitive on international markets. Who would want them?

Yet they provide employment and thus have a social value. They also have a political value in the negative respect that closing them and augmenting unemployment is politically destabilizing. For this reason the government agency responsible for East German privatization, the Treuhandanstalt, has been very cautious in demanding that those who buy up former state enterprises guarantee continuing investment and job protection. This has earned it criticism from such ideologically committed journals as The Economist, which protests that to combine ''social policy and industrial policy together in one institution'' jeopardizes both.

There also is a political cost in selling enterprises to Western buyers. The public risks seeing this as industrial abdication (''selling off the family jewels,'' as Harold MacMillan once said of Margaret Thatcher's privatizations.)

Moreover, even when the buyer makes a major commitment to modernization, it's not always a success. A recent Radio Free Europe report tells of General Electric's purchase in 1989 of the Hungarian electrical manufacturer, Tungsram, which was one of Eastern Europe's few successful enterprises, exporting to BMW and Mercedes and to Japanese car manufacturers.

Despite drastic efforts by the new GE managers, heavy investment in new equipment, and the advantage of low-cost Hungarian labor (one-tenth U.S. labor costs) Tungsram lost money in both 1990 and 1991, and goes on doing so. Overmanning was one problem, but the real ones, according to the company's head (George F. Varga), who had previously run GE's subsidiary in the Netherlands, were the attitudes and assumptions held by the work force.

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