The
End of Neo-liberalism?
by Joseph E.
Stiglitz
NEW YORK– 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, Indiaand Chinabecame 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
Statesand 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 USgovernment should have done more to help
low-income Americans with their housing. I agree. But that does not change the
facts: USbanks 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.
Joseph E.
Stiglitz, Professor at ColumbiaUniversity, received the 2001 Nobel Prize in
economics. He is the co-author, with Linda Bilmes, of The Three Trillion Dollar
War: The True Costs of the Iraq Conflict.
Copyright:
Project Syndicate, 2008.
www.project-syndicate.org
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