How Countries Compete: Strategy, Structure and Government in the Global Economy. By Richard H.K. Vietor. Harvard Business School Press, 305 pages.

On July 21^st, former Speaker of the House Newt Gingrich strongly criticized the general competence of American government:

“the machinery of [American] government is broken… we are reaching a crisis of competency in our government’s capacity to execute its core functions. This is a serious threat to America’s position as the most powerful country in the world. As a conservative, I am dubious of government’s attempts to do what should be left to the private sector. However, I am adamant that in the areas government is involved, we should insist on the same performance standard we expect in everyday life.”

Gingrich argues that tasks that used to be feasible for the government—such as helping rebuild Chicago or San Francisco after natural disasters, completing the Manhattan project or putting a man on the moon—now seem too difficult for the government to accomplish effectively. Even more simple tasks—such as protecting the border or effectively assisting flood victims from New Orleans—seem arduous, for a variety of reasons, including bureaucratic infighting, a sometime-lack of experience in managing crises at the top, faulty or incomplete information inputs for decision-making processes, etc.

Effective governments—those that guarantee security, ensure the validity of contracts, adequately manage the macroeconomy by creating a climate of stability, low inflation, competitive exchange rates and responsible fiscal policy—can undergird economic growth and help improve the general well-being of a society.

For those who agree with Gingrich, a new book, How Countries Compete: Strategy, Structure and Government in the Global Economy, by Harvard Business School professor Richard H.K. Vietor, offers interesting perspectives on how general good governance reinforces national success. The book is empirical, rather than ideological. Vietor discusses effective government (or lack thereof) in 11 countries and regions, including Singapore, China, the United States, South Africa, India, Mexico and Europe (taking Italy as a case study).

Vietor illustrates how effective governments—those that guarantee security, ensure the validity of contracts, adequately manage the macroeconomy by creating a climate of stability, low inflation, competitive exchange rates and responsible fiscal policy—can undergird economic growth and help improve the general well-being of a society. Taking Singapore as an example, Vietor argues that the city-state

has been run much like a corporation. While cabinet officers are politicians, they tend to be particularly talented individuals—often educated abroad in business or economics. And the civil service itself is extraordinarily well educated, motivated, talented, and well compensated…The prime minister’s salary in 2000 was a bit more than US$1.1. million; even his most junior minister received US$550,000…the government argued that high salaries were necessary to retain talent. [Singapore’s] first prime minister defended the practice, stating 'See it in proportion to what is at stake.’ [Singapore’s second Prime Minister] Goh Chock Tong further reasoned ‘The damage we had prevented to the economy from the Asian financial crisis is more than enough to pay the ministers and the other political office holders for the rest of their political lives and in fact over many lifetimes.’

The general formula is that “entry-level ministers or permanent senior secretaries earned 60 percent of the median salary of the eight top earners in six professions, ranging from bankers to multinational CEOs.” The bonuses of senior officials and many departmental budgets:

were tied to the country’s GDP performance. ‘We are 100 percent government, but in terms of operational discipline, we are run like the private sector,’ explained a senior director at the EDB [Singapore’s Economic Development Board]. Thus, in 2002, with an economic downturn, senior ministers suffered appropriately.

Singapore’s model has delivered strong growth in a sustainable manner: in less than a generation, “the city that was once a polluted jungle village is among the cleanest, most modern cities in the world.” An independent group called the “Corrupt Practices Investigation Board” (founded in 1952) has ensured that Singapore’s government is “renowned for its honesty and transparency.”

The United States, a diverse country of 300 million people, cannot be compared, on the whole, to a small city-state like Singapore. But Singapore’s efficient civil service and general competence of government can perhaps provide American policymakers with useful ideas—running a government like a business is an idea worth considering, though it would require increased spending to give civil servants the higher salaries that could lure top talent from the private sector; perhaps fiscal conservatives will agree to that if the general competence were to increase in tandem.

Conversely, Vietor shows how bad economic governance—governance that does not adequately guarantee security against crime, private property rights, the integrity of contracts, low inflation and general fiscal responsibility, and those that overregulate or control whole swaths of industry inefficiently—can severely impede economic growth, entrepreneurship and the general well-being of a society. India’s economic governance is a case in point. Following Indian independence,

a combination of high tariffs and quotas were placed on all goods coming into the country. Tariffs ranged up to 350 percent…Obtaining permission to import a [so-called] restricted good required sixteen separate procedures, involving a variety of ministries… The government set prices for many goods and services [including] coal steel, pharmaceuticals, sugar, cooking oils, electricity and lightbulbs... “Sick unit” regulation prevented companies from going bankrupt, subsidizing them through state-owned banks… [and] one hundred separate rules explicitly ruled out financial difficulty as a basis for layoffs.”

In recent years, reforms easing restrictions on foreign investment, lowering tariffs, and permitting joint ventures between public enterprises and private firms were implemented. Yet much remains to be done: the formal economy in India only includes about 30 million people. This limits the available tax revenue necessary to modernize infrastructure. Moreover, much-needed privatization remains politically difficult. When a reform-oriented Minister, Arun Shourie, headed the Divestment Ministry in 2002, his privatization plans were stalled by politicians, unions, and the media. Commenting on the wasteful firms he was privatizing, Shourie told Vietor: “I’m disposing of bleeding ulcers, but the allegation is that I’m selling the crown jewels.”

Economic governance as was undertaken in post-independence India is not only economically harmful but also carries with it general social costs: with an economy so hamstrung, investment and modernization of basic necessities are rendered difficult and arduous. In a poor country, that has severe implications.

Vietor also discusses the European Union, which is “stagnating in productivity growth, in competitiveness, and in its structural adjustments to globalization.” Vietor finds that “Unaffordable social policies, inadequate [higher] educational systems, and a lack of entrepreneurship are among the problems that undermine growth… Globalization and global competition have overtaken past [European] policy. Adjustment is overdue.”

The book is fairly even-handed until Vietor gets to the United States. Vietor argues that “while inflation dropped sharply and the Soviet Union collapsed, the Reagan revolution failed. It delivered slow growth, huge budget and trade deficits, and perhaps most seriously, worsening income inequality. Reagan’s successor [Bush senior] only exacerbated things. The correction began in 1993, when the Clinton Administration committed itself to deficit reduction.” This article is too short for an adequate refutation of these opinions.

In another section, Vietor briefly dabbles in foreign policy, writing that “[in 1991] the United States perhaps erred by not finishing the job of attacking Baghdad and getting rid of Saddam Hussein.” True, perhaps, but hindsight vision is always 20/20.

There are a number of legitimate concerns that Vietor raises in his section on American growth, however. Among them: the collapse of the personal savings rate in the United States from 10 percent of disposable income in 1980 to a negative rate, -1.1 percent, in July 2005. In May 2007, the rate was even worse, a negative $139.4 billion, 1.4% of disposable income.

Another is the global current account deficit: the Peterson Institute recently found that it is “nearing $800 billion, almost 7 percent of U.S. GDP. To finance both the current account deficit and its own sizable foreign investments, the United States must import about $1 trillion of foreign capital every year or more than $4 billion every working day.”

Furthermore, Vietor is right to note that despite the tax cuts and the war in Iraq, “Republicans did not cut domestic spending…. in fact, discretionary spending actually rose… defense spending [was] at a record high… and entitlements [continue] to grow uncontrollably.”

Yet his solutions to these real problems seem truly strange and inadequate: “One could envision a different president after 2008 who would choose to raise taxes on the rich and cut spending on agricultural and infrastructural pork, thus again reducing the deficit. To curtail our massive defense obligations, that new administration could help the United Nations take responsibility in Iraq, eventually extricating the United States from its ruinous involvement in the Middle East.”

As good as the book is as a whole, equally inadequate are these prescriptions—because unlike the prescriptions Vietor gives to foreign countries, his prescriptions for the United States are heavily politicized. In no other country does he advocate raising taxes on the rich, or yielding more influence to the United Nations.

The key to shoring up American fiscal sustainability, moreover, lies not so much in attacking pork or agricultural subsidies or in raising taxes “on the rich”, though tackling agricultural subsidies could have an important impact. Rather, it lies in reforming entitlements, with future deficits for Social Security, Medicare and Medicaid projected of $50 trillion. Tax increases on “the rich” cannot forestall these deficits: instead, spending will have to be curbed.

In addition, a number of small errors should have been corrected before publication, including “expatriot [sic] Chinese”, “John [sic] Hopkins University,” “African’s [sic] Claims in South Africa” and a few others.

On the whole, though, the book is recommended for those seeking greater knowledge of economies throughout the world and post-war economic history, in clear, understandable language accessible to all those with a basic knowledge of economics. It is particularly recommended for business executives interested in gaining greater knowledge of countries abroad before investing there.

Jurgen Reinhoudt is a research assistant at the American Enterprise Institute.