America's business modelBy William Pfaff (International Herald Tribune)29 June, 2002
SAINT CEZAIRE-SUR-SAIGNE, France: The prosperity, growth and soaring stock markets of the past decade have depended heavily on international confidence in the American business model, which Washington has urged everyone else to adopt at the risk of being left behind in the U.S.-created New Economy.
This model is now discredited, and not by a few exceptional cases - Enron, Dynegy, Global Crossing, Qwest and now WorldCom - but by revelations of fraudulent accounting in a number of companies.
American regulators are under fire for neglect of duty and auditors for having - as a former enforcement chief of the Securities and Exchange Commission, Stanley Sporkin, puts it - provided corporate swindlers with professional assistance.
Any business model based on meeting a single criterion - in this case, stock price - must be oversimplified. Worse, the criterion in use today is an inherently illogical one, mandating major annual profit increases, whatever the flow of business activity and the state of the economy. This is an open invitation to accounts-churning and the fraudulent fiscal reporting that has now been revealed.
Today's American business model is a recent one. It could be discarded and replaced by something more rational, were there the will to do so. But ideology and greed stand in the way. The ideology is deregulation.
Rockwell Schnabel, the U.S. ambassador to the European Union, has just made a plea in Brussels for an "improved" European regulatory regime. This turns out to be one with less (but "better") regulation, in which those being regulated would have more influence on setting standards. It ignores the fact that corporate and auditing self-regulation in the United States not only allowed the current scandals to happen but also were sometimes complicit in them.
The regulatory - or self-regulatory - regime that has prevailed in the United States since the 1980s has allowed the development of what The Wall Street Journal, in its news columns, describes as corporate transgression, venality and fraud that "exceed anything the United States has witnessed since the years preceding the Great Depression."
The American pattern of deregulation and finance-focused management has been an essential part of the standard globalization model, promoted by the Treasury and the International Monetary Fund. It gets harsh treatment in "Globalization and Its Discontents," a new book by the economist and Nobel Prize winner Joseph Stiglitz.
Stiglitz says that in his career with the international financial institutions, he found the IMF to be the victim of "a curious blend of ideology and bad economics, dogma that sometimes seemed to be thinly veiled special interests." When crises struck, the IMF consistently "prescribed outmoded, inappropriate, if 'standard' solutions, without considering the effects they would have on the people in the countries told to follow these policies."
Even though criticism of the IMF's model for austere structural adjustment policies, currency stability and foreign debt repayment has become common today (Argentina is just one of its unresolved current crises), the "outmoded and inappropriate" thought behind IMF decisions has yet to be abandoned.
It has persisted because an alternative is not evident. The same claim cannot be made for the irrelevant Washington - and Wall Street - economic consensus that defends the malfunctioning American business model. There is an alternative.
The alternative is yesterday, when American business practiced a responsible capitalism that considered itself responsible to employees, to the public interest and to stockholders. Its alleged inefficiencies pale by comparison with today's multibillion-dollar scandals and corporate malversation.
The Bush administration seems too deeply implicated in the existing system to appreciate how deficient it is, and Congress is all but paralyzed by the money corruption of the election system.
The grip of established interests and accepted wisdom is hard to loosen - short of a wrenching crisis that simply overthrows it, as when the market crash of 1929 destroyed the speculative overhang, and the rationale, of an earlier American New Economy. That is learning and reforming the hard way. Sometimes, though, it is the only way.
