AUF WIEDERSEHEN, SAYONARA

James Bartholomew on the shattered pride of the world's most overpraised economies

FIRST GERMANY, now Japan. We have lost our last economic heroes. So many have already fallen by the wayside, causing mortal embarrassment to those who once worshipped the false God of the perfect economy.

Remember Sweden? The older among us can recall the time when some Labour Party adherents would blush when the name of Sweden was mentioned. How wonderful those Swedes were with their lavish social welfare combined, yes, com- bined with prosperity and growth. It just went to prove that it could be done. Everything they did must be right. We had to copy them in every respect. That was just two decades ago — two decades of low growth in Sweden followed by policy reversals.

Then there was Yugoslavia. I can remember — admittedly in Paris, in 1968 — being told that although no example of a wholly successful communist state cur- rently existed, Yugoslavia with its 'worker co-operatives' was showing us the way to go, oh yes indeed.

But the eclipse of the star status of Japan and Germany is different in kind from the falls of Sweden and Yugoslavia. The successes of the socialist countries were illusory. The successes of Japan and Germany have been real enough. The point about Japan and Germany is not that their success stories were frauds but that their greatest successes are behind them. Now that they are rich countries with well-fed, well-educated, well-travelled pop- ulations, they can only grow at the pace at which they can improve on what is already the best. They are at the frontiers of the economically possible. It is slow work, hacking away at virgin jungle.

The stockmarket crash in Japan — the Nikkei Index falling 20 per cent in the past three months — has arrived because that country did not want to accept the inevitable slowdown of its advance. During the late 1980s, Japan tried to keep its econ- omy growing well beyond its capacity. It was reminiscent of our own sad attempts to prove that we are still a high-growth coun- try: the 'dash for growth' in 1972-73 and Mr Lawson's boom of 1987-89. The Japanese boom was more akin to our 1972- 73 experience — in that it is being followed by a massive stockmarket bust.

The Japanese economy grew by an aver- age of over 5 per cent a year from 1988 to 1991 with annual growth reaching a frantic 8.3 per cent in the first quarter of 1991. That was an illusion — a fantasy based on soaring money-supply growth. The subse- quent and inevitable stockmarket crash is a harbinger of tough economic times ahead. In the immediate future, Japan faces reces- sion with all the normal ingredients: rising bankruptcies and unemployment. Com- mentators are reluctant to admit what is happening because they, too, cling to the idea of Japan as an idol. But already indus- trial investment has fallen and in the first two months of this year manufacturing production was down 4 per cent compared to the year before. The increasing Japanese trade surplus, so often given as a measure of success, is in fact another sign of the coming recession. Imports from France are down by all of 25 per cent because the Japanese consumer is having to give up some of life's luxuries.

The recession will finally bring home the fact that Japan is no longer so very differ- ent from the rest of us. No, Japan has not found the secret of eternal vigorous growth. No, it cannot go on indefinitely churning out 5 per cent GNP increases each year. Japan is, like Britain, an ex- growth economy or, to be more precise, an ex-high-growth economy. Certainly it will go on growing. It may still hope for as much as 3.5 per cent growth a year, a point or so faster than other mature economies such as our own. That is fine, but not the stuff out of which heroes are made. It is not the difference between triumph and disaster. It is more like the difference between two old ladies shuffling along the road on the way to a coffee morning. One is a yard ahead and very gradually extend- ing her lead, but her speed is declining.

As for Germany, we should long ago have given up doffing our caps in the direction of Bonn and Frankfurt. Germany is currently suffering not just from reces- sion but a disease which was supposed to be particularly British: stagflation. Retail sales volumes are down 1.5 per cent on a Year ago but inflation remains stubborn. Meanwhile the budget deficit soared last year at a rate which, if it continued, would make Germany ineligible to join Economic and Monetary Union. Sorry, we only accept responsible members. But even before its problems of assimilating East Germany, West Germany for a decade had been a feeble old lady with an unlikely ability to attract admirers. In the 1980s its average annual growth rate was a mere .1.9 Per cent. Both Britain and America did better than that. The United States grew at 3.3 per cent a year (boosted by population growth of 1 per cent a year) and Britain did best of the three (adjusted for popula- tion growth), growing at 2.6 per cent a Year. If anything, Germany should be Copying us, not the other way around.

But even if Germany and Japan were still fast growing economies, there would still be no reason to imitate them in every respect. The would-be imitators fall into a simple logical fallacy something like this: the state of Paradiso is a success; the peo- ple of Paradiso eat snails; therefore suc- cess comes from eating snails. A version of this fallacy was practised extensively during the election campaign by the Labour Party. This stock answer must have been in their interview crib. It went like this:

Interviewer: Practically every study of the subject suggests that your policy of mini-

mum wages would increase unemploy- ment.

Labour Party candidate: Most countries on the Continent have minimum wages and their economies are successful. There- fore minimum wages are good.

This snail-eating argument always seemed to work. No interviewer that I heard ever suggested that minimum wages were not proven as the cause of the what- ever success Continental countries had enjoyed. Indeed it was just as possible, the interviewers might have suggested (but never did), that the success had been achieved in spite of minimum wages rather than because of them. Otherwise we might as well copy every aspect of any country which has done a bit better than us here or there. We had better invite the Mafia to town because Italy has the Mafia and has grown faster than us since the war.

Those on the Left, having had to aban- don Sweden and Yugoslavia, have been energetically snail-hunting in the success- ful capitalist economies. Thus Japan has been invoked to justify government inter- ference in industry on the basis that Japan's Ministry of Trade and Industry (Miti) has played a major role in Japan's economic development. But it is just as possible that Japan has succeeded despite Miti, not because of it. Similarly, Ger- many's worker representatives on compa- ny boards have been used to tout something similar in Britain, particularly by the Liberal Democrats. But, again, it is per- fectly reasonable to think that this practice has been a handicap for Germany. After all, Japan goes without workers on the board. And Germany, for that matter, goes without a Miti.

The admiring study of foreign countries and their performance is only useful if it is done by looking at different countries at different times. If one looks for countries which have had sustained periods of high economic growth there are many things which they did not have in common. They certainly did not all have Miti, or workers on boards. They were neither all dictator- ships nor all democracies; some had rapid inflation, whereas others had stable prices; some had good labour relations, whereas others had violent strikes. There are some examples where, at an early stage, the level of education and training was poor but oth- ers where it was good. But there is one thing all have in common: they were capi- talist. They allowed people to own their own property, to start businesses and to keep most of the profits (whether legally or illegally does not seem to matter much, as Indonesia and Italy have demonstrated).

The people who have understood this simple fact most clearly are, ironically, not those in the West who have benefited from capitalism but those in Eastern Europe who have suffered from going without it.