End of Neo-liberalism?

BY N.A.D.E.S AMARATUNGA-May 31, 2018

Neo-liberalism and its future developments would be very much relevant to us in Sri Lanka at this juncture, as the present government seems to be getting locked into a system run by the unholy trinity of the IMF, WTO and the World Bank, which at present are guided by the neo-liberal policies of the western powers. In the West neo-liberalism has caused a huge growth in inequality with the earnings of the top 10 percent markedly increasing, while that of the bottom 10 percent showing a significant drop. This income inequality has emerged as the most important political issue in these countries.

Most leading economists such as Joseph Stiglitz and Jeffrey Sachs are critical of the worsening situation. The opposition against neo-liberalist policies among the ordinary people is mounting and it is believed that as a result neo-liberalism may have to give way to a better system. Trump's victory and Brexit vote are considered to be direct consequences of the people's opposition to this system. This discontent seems to engulf the whole West, and it is hoped it would bring in a more desirable system which would serve everybody everywhere equally well. Leading economists are of the view that neo-liberalism in its present form has had its day and is in decline. But it may be too early to celebrate.

The basis of neo-liberalism is the idea that the market is the prime determinant of not only prices of goods, and matters related to trade and commerce, but also social characters and human values. This would mean there is no need for the government to intervene on behalf of the people, and market forces would most efficiently guide the economy with benefits to all stake holders. This theory was first mooted by Friedrich von Hayek, and it was more or less a refutation of welfare capitalism advocated by John Maynard Keynes that had been in practice since the end of the World War in 1948. Hayek had advised Margaret Thatcher on the virtues of neo-liberal economic policies and these were subsequently adopted during Ronald Reagan's time in the US and Margaret Thatcher's in the UK.

These policies had virtually detached the government from the process of management of the economy, and given the market a free hand to run the economy. During the era of welfare capitalism and Keynesianism that existed from the late 40s to the early 70s, the governments in the western countries had taken measures to protect the ordinary people from the depredations of market forces. Reagan and Thatcher, however, had seen these policies as an impediment to economic development. They came to believe that unrestrained market forces were a better driver of the economy. Thus was born neo-liberalism and its offshoot globalization, which was designed to force the rest of the world to fall in line and accept their open-borders, export-led growth policy. The IMF, WTO and the World Bank were rearranged to serve this purpose.

However, these economic policies have not done any good to the majority of people in the world, including the West. From 1948 to 1972 when welfarism was in practice in the US, every section of the population experienced very similar sizable increases in their standard of living. In comparison between 1972 and 2013 the bottom 10 percent income earners experienced falling real income, while the top 10 percent did far better than everyone else. The median real income for full-time male workers is now lower than it was few decades ago. The income of the bottom 90 percent of the population has stagnated for over 30 years. On average, between 65 to 70 percent of households in 25 high-income economies in the world experienced stagnant or falling real incomes between 2005 and 2014.

In comparison, during the period of welfare capitalism - from end of the war to early 70s – growth rate was double that of the neo-liberal period from 1980 to the present. Moreover a comparison of poverty rates in the pre and post-welfare periods in the developed world, shows that welfarism had definitely helped in poverty reduction; for instance in Sweden poverty rate was 23.7 in the pre-welfare period and it was reduced to 5.8 after the introduction of welfare policies.

The revolt against neo-liberalism is developing and as mentioned has caused political upheaval across the west on both sides of the Atlantic. Trump and Saunders in the US, Brexit and Corbyn in the UK, Le Pen in France and several other similar phenomena in Europe herald the downturn of neo-liberalism. This revolt led by the working class - which is not the same as the labour movement - is often referred to as populism in a denigrating and dismissive fashion. However, this revolt seemed to have paralyzed the governing elite in the UK, it has already claimed one prime minister and left the latest one fumbling around in the dark. In the US though, this revolt propelled Donald Trump to victory he is also floundering as he doesn't seem to have a clear policy to deliver what he promised to the disadvantaged people who feel 'left behind' and voted for him. The 'Occupy Wall Street' phenomena could be attributed to this working class movement. This movement is very much active and is gathering momentum.

In spite of the evidently disastrous performance of neo-liberalism in the western countries as well as in other parts of the world, Sri Lanka seems to be reluctant to resist the dictate of the IMF and the 'Washington Consensus'. Neo-liberal policies practiced in the West include free-market policy, less government involvement, privatization, austerity, low public expenditure, less welfarism, commodification and encouragement of immigration of labour. These policies help the rich to accumulate wealth while the incomes of the poor stagnate or decline. Some of these policies are being diligently followed by Sri Lanka on the advice of the IMF at present. The present leadership does not seem to know that the most successful developing countries have not followed neo-liberal policies.

China for instance has its own homespun policies, both in terms of poverty reduction and industrialization it has outperformed most of the developed countries. Malaysia under Mahathir Mohamad refused to play ball with the IMF and he has made a comeback at the age of ninety two. South Africa started manufacturing AIDS drugs and distributing them free and also installed free water supply to the people, despite of tremendous pressure from the pharmaceutical industry and the IMF. Sri Lanka has burdened its poor with heavy taxes and fuel price increases and seems to be indirectly cutting down on free health and education. Availability of drugs and services is poor in the government hospitals forcing the sick to seek private health facilities. Education often is not available in government schools forcing children to seek private tuition. Senior citizens' savings are also taxed. The government has secretly entered into trade agreements with other countries with terms that may be adverse to us. The US has similar agreements with Mexico and other countries which encourage immigration of cheap labour. This is to reduce the bargaining power of trade unions.

Joseph Stiglitz, Professor of Economics at Columbia University and former senior vice president of The World Bank and Nobel Memorial Prize winner, wrote in April 2000 in an article for the New Republic "They will say the IMF's economic 'remedies' often make things worse – turning slowdowns into recessions and recessions into depressions. And they will have a point. I was chief economist at the World Bank from 1966 until last November, during the gravest global economic crisis in a half century. I saw how the IMF, in tandem with the US Treasury Department, responded. And I was appalled." He was made to resign from his post in the World Bank. John Maynard Keynes in his book 'National Self Sufficiency' (1933) says "Ideas, knowledge, science, hospitality, travel, - these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible and above all let finance be primarily national. Experience accumulates to prove that most modern processes of mass production can be performed in most countries and climates with almost equal efficiency."

Sri Lanka is in need of a strong courageous leader who will not slavishly obey the dictates of the IMF. We need a national economy based on Keynesian principles, both with regard to finance and also production of goods. We need an economy based on rural agriculture with rural development as its priority. We need to escape from the clutches of neo-liberalism.