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Thursday, 10 July 2008

The end of neo-liberalism?

Joseph Stiglitz argues in his latest piece that the era of unrestrained trust in markets is coming to an end thanks to the painful lessons of the current food prices and the "sub-prime" housing crisis in the USA.

The end of neo-liberalism?, by Joseph E. Stiglitz, Commentary, Project Syndicate:

The world has not been kind to neo-liberalism, that grab-bag of ideas based on the fundamentalist notion that markets are self-correcting, allocate resources efficiently, and serve the public interest well. It was this market fundamentalism that underlay Thatcherism, Reaganomics, and the so-called “Washington Consensus” in favor of privatization, liberalization, and independent central banks focusing single-mindedly on inflation.

For a quarter-century, there has been a contest among developing countries, and the losers are clear: countries that pursued neo-liberal policies not only lost the growth sweepstakes; when they did grow, the benefits accrued disproportionately to those at the top.

Though neo-liberals do not want to admit it, their ideology also failed another test. No one can claim that financial markets did a stellar job in allocating resources in the late 1990’s, with 97% of investments in fiber optics taking years to see any light. But at least that mistake had an unintended benefit: as costs of communication were driven down, India and China became more integrated into the global economy.

But it is hard to see such benefits to the massive misallocation of resources to housing. The newly constructed homes built for families that could not afford them get trashed and gutted as millions of families are forced out of their homes, in some communities, government has finally stepped in – to remove the remains. In others, the blight spreads. So even those who have been model citizens, borrowing prudently and maintaining their homes, now find that markets have driven down the value of their homes beyond their worst nightmares.

To be sure, there were some short-term benefits from the excess investment in real estate: some Americans (perhaps only for a few months) enjoyed the pleasures of home ownership and living in a bigger home than they otherwise would have. But at what a cost to themselves and the world economy!

Millions will lose their life savings as they lose their homes. And the housing foreclosures have precipitated a global slowdown. There is an increasing consensus on the prognosis: this downturn will be prolonged and widespread.

Nor did markets prepare us well for soaring oil and food prices. Of course, neither sector is an example of free-market economics, but that is partly the point: free-market rhetoric has been used selectively – embraced when it serves special interests and discarded when it does not.

Perhaps one of the few virtues of George W. Bush’s administration is that the gap between rhetoric and reality is narrower than it was under Ronald Reagan. For all Reagan’s free-trade rhetoric, he freely imposed trade restrictions, including the notorious “voluntary” export restraints on automobiles.

Bush’s policies have been worse, but the extent to which he has openly served America’s military-industrial complex has been more naked. The only time that the Bush administration turned green was when it came to ethanol subsidies, whose
environmental benefits are dubious. Distortions in the energy market (especially through the tax system) continue, and if Bush could have gotten away with it, matters would have been worse.

This mixture of free-market rhetoric and government intervention has worked particularly badly for developing countries. They were told to stop intervening in agriculture, thereby exposing their farmers to devastating competition from the United States and Europe. Their farmers might have been able to compete with American and European farmers, but they could not compete with US and European Union subsidies. Not surprisingly, investments in agriculture in developing countries faded, and a food gap widened.

Those who promulgated this mistaken advice do not have to worry about carrying malpractice insurance. The costs will be borne by those in developing countries, especially the poor. This year will see a large rise in poverty, especially if we measure it correctly.

Simply put, in a world of plenty, millions in the developing world still cannot afford the minimum nutritional requirements. In many countries, increases in food and energy prices will have a particularly devastating effect on the poor, because these items constitute a larger share of their expenditures.

The anger around the world is palpable. Speculators, not surprisingly, have borne more than a little of the wrath. The speculators argue: we are not the cause of the problem; we are simply engaged in “price discovery” – in other words, discovering – a little late to do much about the problem this year – that there is scarcity.

But that answer is disingenuous. Expectations of rising and volatile prices encourage hundreds of millions of farmers to take precautions. They might make more money if they hoard a little of their grain today and sell it later; and if they do not, they won’t be able to afford it if next year’s crop is smaller than hoped. A little grain taken off the market by hundreds of millions of farmers around the world adds up.

Defenders of market fundamentalism want to shift the blame from market failure to government failure. One senior Chinese official was quoted as saying that the problem was that the US government should have done more to help low-income Americans with their housing. I agree. But that does not change the facts: US banks mismanaged risk on a colossal scale, with global consequences, while those running these institutions have walked away with billions of dollars in compensation.

Today, there is a mismatch between social and private returns. Unless they are closely aligned, the market system cannot work well. Neo-liberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory. Nor, it should now be clear, is it supported by historical experience. Learning this lesson may be the silver lining in the cloud now hanging over the global economy.


  1. I wonder what neoliberalism will be replaced with.

    However,what is really needed, are policies that involve the majority of the population in the economy in a way that will allow them to accumulate the greatest amount of wealth, not a few corporations.

  2. Its an interesting question!

    More neo-liberalism I'll be rebranded...


  3. Cho,

    To my surprise, studies and theses addressing what would happen after neoliberalism go back at least 9 years. In Mexico, deregulation of the state owned coffee company was followed by re-regulation of smaller units (perhaps interesting in the context of the many small German beer monopolies we discussed earlier) - a switch from a national monopoly to local monopolies. Here are a few links:

    After Neoliberalism: Economic Policies That Work for the Poor
    May 24, 2002

    A Collection of Papers Presented at
    The Conference on Alternatives to Neoliberalism, May 23-24, 2002 in Washington, DC.
    Sponsored by the New Rules for Global Finance Coalition

    1. Introduction and Summary Didier Jacobs, Oxfam America James Weaver, American University

    2. After Neoliberalism, What? Dani Rodrik, Harvard University

    3. Can Sustainable Development Survive Neoliberalism? David Reed, WWF-International

    4. Domestic Demand-Led Growth: A New Paradigm for Development Tom Palley, AFL-CIO

    5. Democratizing Global Economic Governance Didier Jacobs, Oxfam America

    6. International Tax Cooperation and Development Beyond Monterrey Frances Horner, US Conference of Catholic Bishops

    7. Improving Financial Markets: Regulatory Proposals to Dampen Disruptions and Deter Distortions Randall Dodd, Derivatives Study Center

    8. Sovereign Debt Workout Arrangements Kunibert Raffer, University of Vienna Remarks on the Proposal to Create A Sovereign Bankruptcy Court Fernando J. Cardim de Carvalho, IBASE Brazil

    9. Globalization’s Most Perverse Secret: The Role of Export Credit and Investment Insurance Agencies Aaron Goldzimer, Environmental Defense

    10. Capital Account Controls and Related Measures to Avert Financial Crises Ilene Grabel, University of Denver Comments on Capital Account Controls Paper Filomeno S. Sta. Ana III, Action for Economic Reforms, Philippines

    11. Exchange Rate Management John Grieve Smith, University of Cambridge

    12. Conclusion - Where Do We Go From Here? Jo Marie Griesgraber, Oxfam America

    External Link:

    Snyder, Richard.
    After Neoliberalism: The Politics of Reregulation in Mexico
    World Politics - Volume 51, Number 2, January 1999, pp. 173-204

    The Johns Hopkins University Press

    Richard Snyder - After Neoliberalism: The Politics of Reregulation in Mexico - World Politics 51:2 World Politics 51.2 (1999) 173-204 After Neoliberalism: The Politics of Reregulation in Mexico Richard Snyder * Figures Tables In 1989 the Mexican government launched a massive deregulation of agriculture.

    For the mostly foreign-trained technocrats who designed these neoliberal economic reforms, the coffee industry posed perhaps the easiest target for deregulation. Although an entrenched state-owned enterprise -- the Mexican Coffee Institute (INMECAFE)--dominated the industry, a powerful grassroots movement of small coffee producers had already mobilized against it.

    Thus, neoliberal reformers had strong societal allies, making government retrenchment in the coffee sector an easy task. Yet this easy retrenchment had surprising consequences. Rather than leading to unregulated markets, as the neoliberal reformers had anticipated, the dismantling of INMECAFE resulted in the formation of new institutions for market governance. Actors who had not previously intervened in coffee sought to control policy areas vacated by the old state-owned enterprise.

    Most notably, the governments of Mexico's coffee-producing states established new regulatory frameworks and essentially "reregulated" what federal law had deregulated. As a result, by 1994 Mexico's coffee producers found themselves confronting a new and complex regulatory environment and not the free markets that...

  4. This all needs to start with a definition of neo-liberalism because otherwise it's easy to confuse what we're talking about.

    Reaganism, Thatcherism were quite literally about destroying any social elements in what were already capitalist, free-market societies while in many other places, "neo-liberalism" was about changing the economy into a capitalist free-market one.

    The thing that we all know is that free-market capitalist economies need some political, social institutions to function and destroying those institutions or "establishing" a market economy without them is calling for failure.

    The big problem is that most arguments are about extremes. It's either all controls are bad or all controls are good as if we didn't have existing examples or economies that achieved some sort of balance. Like he said, the goal is to align private and social returns and risks, not to swtich the balance towards one or another.

    In Mexico, deregulation of the state owned coffee company was followed by re-regulation of smaller units (perhaps interesting in the context of the many small German beer monopolies we discussed earlier) - a switch from a national monopoly to local monopolies.

    Did you read the full thing ?

    Here's a review:

    The re-regulation situation is complicated. It's a big political battle between producers and civil society and governors and the local ruling class. And not all re-regulation implimented (or proposed) at the local level did promote the interest of "the people".

    It would be nice if the word "regulation" could be understood as a neutral notion by you guys (the extremist free marketeers too). You judge regulations by their content, their aim and their consequences not by the fact that they're called "regulations".

  5. Laroucheyouth

    "Today, we have, with the breakdown of the present corrupt system-and this system can not be saved: The present monetary and financial system can not be saved. Anybody who is trying to save it, by internal reforms, is a fool! It can not be saved. You have to cancel it! Don't treat that as the mother of economy. The mother of economy, a modern economy, is the sovereign nation-state. You have to say, Marx was an idiot, when he invented the term "capital", as he used it: There is no such thing as capitalism, except as a form of disease. It's called "the British disease"! The ideal form of modern economy, is the American System, which was created by all of Europe, and which was admired greatly in other parts of the world, for many years, until recent times.

    The American System of political economy, as set forth by various Americans, including the first Treasury Secretary, Alexander Hamilton, is elementary: The state is responsible for infrastructure. It must control all credit. It must direct banking. It must ensure the flow of credit to those things, which are useful to the nation.

    The things that are required, are:

    One, basic economic infrastructure.

    Second, you must foster inventions - art, improvements, and foster the entrepreneurs who are willing to invest, and risk, in making those improvements. You must protect the markets, which give these entrepreneurs the opportunity to bring their inventions to fruition, not subjects to the ravages of free trade.

    That is the American System. That is the system of economy which is derived, in principle, not from the United States by itself, but from all of Europe's knowledge, in bringing together the idea of the modern nation-state. It's a form of government, whose existence and motive must be the promotion of the improvement of general welfare, of all of the existing people, and their prosperity.

    And that must be government.

    We've come to a time, when the alternative has failed. Free trade, globalization, and so forth, have become horror shows, which destroy us. The floating-exchange-rate system has destroyed the world. It must end."

    -Lyndon LaRouche

  6. Whoa. You juts quoted Lyndon LaRouche.



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