In decades past, First World countries have lectured the rest of the world about how to stabilize and grow their economies. Today, in a startling turnaround, the developed world buckles under high debt and slow growth, while countries such as South Korea, India, Chile, Mexico, and even tiny Barbados provide vital lessons for recovery.
In Asia, South Korea’s rise from poverty demonstrates that prosperity lies not in the balance of trade but in a level of productivity achieved through exporting and importing. This contradicts the too-frequent assumption that exports are good, imports are bad, and a trade surplus is needed for growth. From 1965 to 1990, South Korea ran trade deficits, yet grew by 7.1 percent per year—three times faster than the United States after World War II. Instead of erecting costly protectionist measures in an attempt to keep out imports, developed countries should remember that prosperity is not a zero-sum game.
Fear of foreign domination in India led the Janata Party, in the 1970s, to push for partial Indian ownership of all multinational firms within the country. The result was a spectacular pullback, by companies such as IBM and Coca-Cola, and a stagnant economy. Realizing that fear and resentment were inhibiting progress, in 1991 the Congress Party began easing restrictions on foreign ownership. Since then, investment, growth, and wages have risen dramatically. Although the current government has struggled to implement further opening of the economy, its continued efforts stand in contrast to European Union governments that systematically oppose acquisitions by nonresident companies. Such mistrust of outsiders undercuts the ability of EU countries to create jobs and growth.
Meanwhile, in South America, Chile has taught the world about saving for a rainy day. In 2006, Chile’s treasury held $6 billion in savings. As that number reached almost $50 billion in 2008, protesters in Santiago burned an effigy of Finance Minister Andrés Velasco, vilifying him for refusing to share the riches through increased public spending and higher public-sector wages. But the wisdom of Velasco’s choice soon became clear. The global recession of 2009 forced many countries to endure belt-tightening, while Chile launched a $4 billion package of tax cuts to cushion the impact. Had the governments of advanced nations acted with similar discipline during the flush years from 2002 to 2007, today we might be experiencing a very different recovery.
In Mexico, after suffering through devaluation of the peso in 1994 and a subsequent collapse of the banking system in 1995, the country’s officials took to heart the need for swift and serious reform of its financial sector. Due to decisive action, the Mexican economy recovered quickly, growing 5.5 percent in 1996. Today, Mexico continues to pursue an aggressive reform agenda intended to reduce the country’s reliance on debt and safeguard its financial stability, recently adopting—ahead of schedule—the changes in capital requirements for banks recommended by Basel III. Meanwhile, until the U.S. and EU follow suit, the financial systems of the world’s two largest economic regions remain overextended with too much debt and are at risk for repeated crises.
Finally, little Barbados provides proof that taking the hard road pays off. In 1992 the Caribbean nation faced economic ruin unless it reduced labor costs. The IMF urged the government to devalue the currency, a shortcut that would have slashed workers’ pay without their consent. Instead, then–prime minister Erskine Sandiford engaged in three-way negotiations with labor unions and employers—a longer road, but one that created a lasting solution: workers accepted a 9 percent pay cut in return for linking future wage increases to productivity gains. Sandiford lost the next election and his party was thrown from power for 14 years, but Barbados averted crisis and turned itself around. Instead of bickering and grandstanding, leaders of advanced countries need to roll up their sleeves and hammer out compromises that produce long-term solutions and restore credibility with the public.