The era of free-market capitalism launched in the 1980s by British prime minister Margaret Thatcher and US president Ronald Reagan — often called “neoliberalism” by its opponents — is over. This ideological wave has crashed with the ongoing financial market crisis, but its decline was a long time coming. In the last few years, while leaders in the US continued to ride the neoliberal wave, much of the rest of the world was already standing on the shore.
Disenchantment with “neoliberal,” pro-market ideas began in developing countries that had once been their ardent admirers. Latin American countries that embraced free-market policies in the 1990s rejected them in the mid-2000s as a new wave of left-leaning leaders came to power. Russia, which adopted market-oriented reforms in the 1990s, moved to a managed form of state capitalism in the 2000s with “oligarchs” forced to submit to state control.
As a result, the US, the European Commission and the multilateral development banks have become increasingly isolated in their efforts to advance free-market thought and policies worldwide. The deepening financial crisis weakens their position further. After all, how can the US or the Western multilateral institutions advocate bank privatization now?
The decline of free-market orthodoxy in the rest of the world was caused by two factors: its failures as an approach to economic policy and the decline of US prestige and “soft power.”
“Neoliberalism” grew in popularity as a result of its successes in jump-starting economic growth in the US, the UK and some developing countries in the 1980s and 1990s. However, its weaknesses also became apparent during the mid- to late-1990s. The attempt to implant free-market philosophy in Russia, for instance, proved catastrophic. Whereas the Russian experience clearly demonstrated the importance of strong state institutions in regulating a market economy, the free-market model’s fierce ideological opposition to a large state role in the economy offered a poor guide to building them.
After some successes, most notably in Chile, “neoliberal” advice in Latin America also failed, most dramatically in the case of Argentina’s currency board, but most damagingly by increasing inequality, which worsened the continent’s central political-economic problem. In Brazil, President Luiz Inacio Lula da Silva showed that significant departures from free-market prescriptions worked better. Worldwide, most of the high-growth countries of the 1990s and 2000s broke with free-market orthodoxy by maintaining a stronger state hand in the economy.
Belief in “neoliberalism” was also based on the success of the US economy, which for much of the 1990s seemed to demonstrate the superiority of free markets. But the rapid decline of US prestige and “soft power” during the 2000s sowed doubt outside the US. As the global agenda shifted to concerns about global warming, inequality and the stability of the international system, the US no longer seemed to be a shining example, but rather an immovable obstacle on many of these issues.
The US elites turned a blind eye to these developments, rejecting all criticism, together with the crude anti-Americanism with which it was often expressed. Today, the story is different. A massive reassessment is finally in progress, with US elites now recognizing that market capitalism is in crisis and that the world will not blindly follow their lead.
But that leaves some large questions unresolved. If “neoliberalism” has failed, what comes next? And what must the US do to regain its stature and influence in the international economy?
As New York and London lose their undisputed claim to being the world’s financial capitals, the rising centers of the global economy will gain an increasing say in international economic policy. Most, if not all, are located in countries that have a stronger tradition of state involvement in the economy.
Jeffrey Garten, the dean of Yale’s School of Management, got it right when he labeled this the era of “state capitalism.” The state is on its way back as an economic player — not least in the US.
But is that a good thing? While many critics will be tempted to celebrate the end of “neoliberalism,” it remains to be seen whether what succeeds it represents an improvement. Various forms of statism have been tried before; all have been found lacking. After all, while “neoliberalism” was criticized as technocratic and elitist, it was nonetheless a form of liberalism, and it was also consistent with the spread of democratic governance worldwide.
The new era may not be so propitious for political liberties. As rising authoritarian powers, China and Russia have no reason to use their growing international influence to promote democracy; on the contrary, they increasingly counterbalance the efforts of Western countries to promote political liberty.
As statist models of economic development become more appealing, democratic governance will become less so. Nor is it clear that “state capitalism” can generate the same degree of innovation and entrepreneurship as the liberal models did in their prime.
In order to redeem the liberal project, US and European leaders will need to reformulate it in such a way that it can provide convincing solutions to problems such as environmental degradation and economic inequality. This will be no easy task, and one that may be far from policymakers’ minds as they grapple with the current crisis. But unless they do, the emphasis on economic and political freedom that lies at the heart of liberalism may not survive.
Mitchell A. Orenstein is professor of European studies at Johns Hopkins University’s School of Advanced International Studies.
Copyright: Project Syndicate/Institute for Human Sciences
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