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Viewpoint: From Italy to Mexico, Stability Favored Over Market Orthodoxy

The revolt against '90s economic orthodoxy could usher in more sustainable reforms, better growth and less market volatility.

Slowly but surely, many of the underpinnings of the world's new economic order are crumbling.

This will scare those investors who plowed money into global markets, believing Western countries would adhere to a rigid free-market orthodoxy and help the rest of the world follow its lead. That plan has failed -- miserably, in many places -- and there are signs that countries are gaining the confidence to pursue their own paths of development after a decade of slavishly following blueprints from Washington, London and Brussels.

Farsighted investors, however, will see this revolt against strict '90s economic orthodoxy as a positive development that will pave the way for more sustainable reforms, better growth and even less market volatility.

The decade has been characterized by a mixture of open markets, low inflation, fiscal rectitude and transparent financial systems. The U.S. has been a formidable model and pacesetter, while the

European Union

slashed budget deficits and controlled inflation to comply with the criteria set forth in the

Maastricht Treaty

.

While many emerging nations have, after ruinous years of embracing statism and autarky, implemented reforms similar to the West, the approach has sometimes been ruthlessly applied although clearly not sustainable.

Investors, meanwhile, have been the vigilantes who, by selling bonds and equities, will rapidly whack a country that is stepping out of line.

Part of the problem is that there hasn't been an alternative model for development. Southeast Asia and Japan, once contenders, now conjure up cronyism. Pundits nod their heads in dismay when people mention Japan's

keiretsu

corporate groupings or any other aspect of the country's miraculous postwar development.

The tide, however, is turning.

NATO's

strike against Serbia has appalled many large emerging nations -- not just China and Russia, but also Mexico, Brazil and India -- and is prompting a fundamental questioning of what the U.S. really stands for. Some Mexican political scientists, for example, now wonder whether the U.S. would send cruise missiles crashing into the Zocalo if things got ugly again in Mexico's southern state of Chiapas. This sort of suspicion will only embolden those looking to rethink accepted economic wisdom.

Indeed, much rethinking has already been done. Brazil's successful January devaluation was a brash act of liberation from hard-line economic policies that were pushing the country rapidly toward bankruptcy.

True, it was Brazilians who originated and pursued these policies. But they had plenty of allies among Washington policy wonks and New York bankers, and they held up fear of punishment in international markets whenever skeptics questioned them. The

IMF

, to its credit, was reportedly secretly urging devaluation on the Brazilians when it provided the country with a $42 billion credit line, which is a sign that sense is seeping into one of the bastions of the new order.

This awakening seems to be continuing. The

Group of Seven

nations, or G7, has just drafted a report that says it sees nothing wrong if a country uses temporary capital controls to protect itself against currency speculation. It asks a question that should have been asked years ago: Why should a nation put the demands of free-market purists above that of economic stability?

This goes well beyond a debate about which currency or capital account regime is best and acknowledges that it should be up to the country in question to choose what is best. For example, it made little sense for China to devalue at the height of the Asian crisis -- and its capital controls helped it avoid doing just that. The

Hong Kong Monetary Authority's

huge buying of Hong Kong equities was an indirect defense of its currency, and that worked, too.

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This approach to economic management seems to be working its way back to the developed nations. An example: The EU's decision to allow Italy a slightly higher budget deficit, which was greeted with shock and scorn by many. But it's a sensible move for Italy, which faces slow growth and suffers little inflation.

The U.K. is also snubbing those who put the schemes of international organizations above those of individual countries. Opinion poll results this week show that opposition to adopting the euro has soared in the U.K., despite a heavy pro-euro campaign by the government there.

The discarding of the economic precepts of the NWO will gather pace the more people come to understand its appalling failures. One of its first anointed princes was

Carlos Salinas

, Mexico's former president, now living in self-imposed exile in Ireland and possibly reluctant to return to Mexico out of fear of prosecution.

And it'll be hard to forget Russia. Institutions like the IMF and the U.S.

Treasury

worked together with private investors, sometimes formally, to bankroll hugely unpopular governments in the hope that they could turn Russia capitalist.

Anatoly Chubais

, whom they saw as their kindred spirit, later faced a range of corruption allegations that involved some of Russia's oligarchs.

Despite unprecedented amounts of aid and policy direction by the West, Russia has suffered a GDP decline well in excess of the U.S.'

Great Depression

. The standard of living in Russia, measured in inflation-adjusted rubles, shrank by two-thirds between 1987 and 1996, according to the

World Bank

. And the country has experienced the second-highest increase in income inequality in the whole of the former Eastern Bloc (after the Kyrgyz Republic) between 1987 and 1995, according to the World Bank.

Poland's go-slow approach to privatization has served the country far better than the scheme in neighboring Czech Republic, which tried to rapidly create a nation of shareholders.

So why should investors be reassured by the discrediting of principles that have become so widely held?

First off, it won't mean the end of free markets. Instead, there'll be a much wiser application of them, which will benefit investors.

Compare Mexico and Argentina. Despite pressure from bankers and economists, Mexico has long resisted selling off its oil industry, in the manner of Argentina. Now, the Mexican government gets large and welcomed revenue from oil sales, allowing it to keep dollar borrowing low. Argentina, by contrast, is borrowing at what looks like an unsustainable rate. Unsurprisingly, Mexico's stock market is up far more than Argentina's this year. And Mexico shows no sign of spending itself into a Venezuela-type abyss.

But it is Asia that will most probably puncture the West's arrogance. Many analyses of the Asian crisis lay part of the blame on excesses that periodically affect all types of capitalist economies, not merely Asia-specific factors like cronyism and government-directed investments.

Sooner than you think, Asia, with its stable societies, formidable entrepreneurial spirit and high savings rates, will come roaring back. After a decade of being panned, sometimes deservedly so, a resurgent Japan will quickly win back admirers. It's possible that Japan emerges with new improved

keiretsu

that keep some of their better aspects -- long-term strategic planning, intelligent cross-industry cooperation -- while jettisoning bad things like constricting relationships with the banks.

It is possible that Japan's rebirth may take place just as America's decline begins. Japan's late '80s go-go economy bears much resemblance to America today -- and that's why some Japanese chafe at lectures from the U.S. Treasury.

"In some ways, the Japanese are reluctant to listen to the U.S.," says Chalmers Johnson, president of the

Japan Policy Research Institute

. "They fear the U.S. is going through a bubble economy."