Sunday, April 17, 2016

On Faulty Leftist Attacks of Neoliberalism (featuring Latin America), The Neoliberal Track Record, and Why I Am Not a Neoliberal

During the period of time ranging from ~1980-2008, we were in a period of expanding liquidity and globalization (as I've spoken about previously). During this period, there was a rise of a system for political economy called neoliberalism. Neoliberalism is a framework for political economy that promotes ideas like economic and financial liberalization combined with free capital movements, generally unrestricted trade, and reductions in the size of the state in directing both the financial system and the economy.

Now that we're in the world of contracting liquidity where the world is entering a period of "deglobalization", we're seeing a rise or a return of ideologies that're anti-globalization. Of course, this includes many leftist ideologies and leftist attacks on the most recent world order. Many of these attacks are on "neoliberalism" are faulty, including the attacks from the left using Latin America as an example. Therefore, it makes sense to split up this post into four different parts:
1. On Faulty Leftist Attacks on Neoliberalism

2. Neoliberal Reforms, the Washington Consensus, and Williamson's Ten Points
3. The Neoliberal Track Record
4. Why I Am Not a Neoliberal

1. On Faulty Leftist Attacks on Neoliberalism:
The arguments against "neoliberalism" are really bullshit. For example, these are arguments pushed by those on the left-wing of the political spectrum who always talk about the "horrible impacts" neoliberalism had on Latin America, but if you've actually read the history you'd realize that everything they say is bullshit. For example, if we take Milton Friedman as a classic example of neoliberalism (I actually don't like Milton Friedman) and then go through at the countries that he or the "neoliberals" or the "Chicago Boys" supposedly "endorsed", you quickly realize that these Latin American countries did the exact opposite of what the "Chicago Boys" or the "neoliberals" suggested. For example, Friedman strongly pushed flexible exchange rates for all Latin American countries as a way to prevent the overvaluation of the rate of exchange. He also said that this would eventually force these countries into a balance of payments crisis that would form into a financial crisis that'd turn into a banking crisis which'd turn into a political and social crisis. Well, these countries didn't listen and guess what happened? What happened was exactly what Friedman, the "neoliberals", and the "Chicago Boys" warned.

The leftists also make the argument against what happened in Chile where you had the "neoliberals" supposedly prop up a dictator (Pinochet) who'd do exactly what the these "neoliberals" would tell him through American capitalist imperialism, but that's mostly a lie with a bit of truth. First off, Pinochet never really did take up the reforms as asked by the "neoliberals" and, in most cases, did the exact opposite of what they told him (at least initially). He didn't even listen to their advice on having a flexible exchange rate that Friedman and the Chicago Boys were so insistent on. They said it'd lead to financial, banking, social, and political crisis by distorting the balance of payments until you were forced to devalue as your banking system collapsed. So what happened? Well, the neoliberals were right and Chile had a major crisis like all of the other Latin American countries. After those crises, Pinochet came back to the drawing board with the "neoliberals" and the "Chicago Boys". This time, he decided to take their advice and ACTUALLY TAKE UP LIBERALIZING REFORMS! Eventually, he went through with the market-based reforms, then stepped down from power, and now Chile is only one of two countries in Latin America with stable political institutions. The other country was also forced to take up liberalizing reforms from American "neoliberals" purely because of its close proximity with the United States after it had a financial crisis in much the same way. So any way you wanna cut the cake, the neoliberals were almost entirely correct and any sensible (by sensible, I mean not hyper-sentimental) reading of the history will lead you to that conclusion.

2. Neoliberal Reforms, the Washington Consensus, and Williamson's Ten Points:
If you actually read through the reforms the "neoliberals" were suggesting, you'd come to the realization that almost all of Latin America has never ever made an attempt to even go through half of those reforms. The only countries that have gone through the reforms actually suggested by the "neoliberals" and the "Chicago Boys" are Mexico and Chile--both of whom did so after not taking up the "neoliberal doctrine" after which they ended up in crisis.

If you don't believe me, just look at the actual reforms that the supposed "neoliberals" were asking for. This is called the Washington Consensus. The specific neoliberal reforms that were pushed by the "Chicago Boys" and Milton Friedman were almost entirely the same as Williamson's Ten Points. These were the Ten Points Williamson recommended:
1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP
2. Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment
3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
4. Interest rates that are market determined and positive (but moderate) in real terms;
5. Competitive exchange rates
6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
7. Liberalization of inward foreign direct investment;
8. Privatization of state enterprises;
9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
10. Legal security for property rights.

In Latin America, most countries have never actually had legal security for property rights (only Mexico and Chile). Most countries in Latin America who blamed the "neoliberals", the "Chicago Boys", or other similar groups for their financial crises ended up in their financial crises because they had fixed exchange rates and refused to adopt flexible exchange rates. Most countries in Latin America still rely on public subsidies and are drastically underinvested in primary education, primary healthcare, and lack good infrastructure (the primary exceptions here are Mexico and Chile, again). The tax system in most of Latin America is so messed up that there's no real incentive to take risks or fail, especially when you add in the lack of a rule of law and legal protection for property rights. They never actually liberalized trade in any way and most of these countries still haven't liberalized either trade or capital flows (only Chile and Mexico have done these things). Most countries in Latin America have ZERO discipline when it comes to fiscal policy, which is why they usually resorted to fixed exchange rates to quell inflation since a flexible exchange rate would create a balance of payments problems since these countries have little institutional credibility which would force up inflation. Only two countries in Latin America have actually taken up policies of deregulation (Mexico and Chile). Most countries in Latin America still have massive amounts of state-owned enterprises (again, Mexico and Chile have relatively less). Also note that countries like Cuba or Venezuela or Bolivia or Colombia or Brazil that're in real dire straights right now with collapsing currencies, rampant corruption, and civil/political unrest ALL have financial and economic systems with state-owned enterprises and high business regulations preventing competition for those state-owned firms.

3. The Neoliberal Track Record:
So now that we've discussed the basics of the faulty leftist attacks on neoliberalism and the neoliberal suggestions for reform, let's look at the actual track record of neoliberalism. As we've demonstrated above, the track record of "neoliberal reforms" is nowhere near as bad as the leftist creed would make you believe. With that being said, let's actually see what success stories are hidden by leftists. So let's see where neoliberal reforms actually worked.

The classic example of neoliberal reforms working properly is in a country like India. From 1947-1990, the entire Indian government was controlled by the Indian National Congress which was a party with leftist leanings that took up a policy of combining British-style parliamentary democracy with Soviet-style central planning. What were the results? From 1947-1990, India's economic growth was ~1% per capita. During this period, India's population increased from ~300 million to >1 billion as India barely developed. In 1990-91, India's leftist economic policies were failing so badly that the government was forced to choose between a financial crisis that'd lead to political/social chaos or financial liberalization. The Congress politician had no choice but to choose the latter because it was simply much less costly.
Note: When you have ~1% GDP growth/capita for ~50 years while your population more than triples, that's quite sad. Now, 1% GDP growth/capita can actually lead to great increases in the standard of living while making real changes in development, but remember that there's also from a tripling of population in ~50 years that places costs on a society not seen in GDP calculations like environmental degradation or the required use of fossil fuels like coal to maintain energy or the costs of additional infrastructure and the costs of the provision of basic social services for the populace that're usually paid in the future.

Since the beginning of liberalization reforms, the Indian economy has grown at >5% per capita while almost all Indian states have fertility rates below the United States as most of the population growth is concentrated in a few specific states or districts. In other words, the "neoliberal" reforms that were taken up in 1990-91 were absolutely critical for India. Trade was liberalized so the large, protected Indian firms that were inefficient faced serious competition while barriers of entry were dropped. The financial system was liberalized to provide/distribute credit and capital more broadly at a cheaper cost. India's liberalization of capital flows allowed for foreign investment in Indian firms and provided India access to foreign technology, foreign capital, foreign organizational structure, and foreign institutions that carried significant credibility with them. Subsidies for state "regulated" firms were wound down, reduced, and even eliminated. Barriers to entry into the market place were also significantly brought down. The exchange rate was allowed to float freely (the fixed exchange rate was largely responsible for the crisis). Many SOEs were eventually privatized or at least partially privatized.

All of these shifts created an incredible shift in India's political, economic, financial, and social systems. These reforms unleashed ingenuity and the kinds of entrepreneurial spirit India had access to. The innovating ability and potential of India has shown its power, but the problem is that the costs from the rise in population based on the leftist model that India had been on for ~50 years placed entrenched bureaucracies that made it impossible for the country to function while the centrally planned industrialization allowed the agrarian society that still had massive fertility rates to sustain those fertility rates by forced interventions of the central government into the villages and countrysides of India all at once. Had the interventions been slower and more drawn out (as the British suggested, ironically enough), there'd be much less suffering in India today.

There were regulations that were suddenly placed on how businesses could hire and forced them to require government permission before hiring or firing workers. The financial system was nationalized as a way to protect government cronies and support patronage networks for the leadership to maintain power. In the end, the results were pathetic while the costs were all born by its future population. Of course, this reversed in 1990 although most of the damage had been done by then.

Other neoliberal successes involve countries like South Korea. In the 50's, China was actually wealthier than South Korea. South Korea was incredibly poor in the 50's, but then took up policies that resembled the "neoliberal" reforms as time went on. The "neoliberal" reforms in the 90's that Korea and other Asian countries took up were extremely successful. In many parts of Southeast Asia, there's many different countries that've done well via the "neoliberal" approach including Indonesia and Malaysia that've actually seen successful development.

As we've shown, the neoliberal reforms and neoliberal view worked quite well in a world that operated under a certain given set of circumstances. As usual, this is contrary to the leftist arguments about neoliberalism that're constantly thrown around. To put simply, the track record of neoliberal generally contains much more good than bad.

Note: Even when we look at the supposed "neoliberal failures", to which Latin America or Eastern Europe is used as an example, we quickly begin to realize that most of Latin America never actually took up those reforms. For the countries in Latin America that did take up those reforms, they're the only functioning countries in the region right now (Chile and Mexico). In most of the other countries in Latin America, they're ruled by strongmen who're generally leftist or fascist and view neoliberalism as a shill for "American imperialism". Even in the cases where neoliberal reforms took place after a violent overthrow of government from an imperial power, we begin to see that these reforms worked while those countries on the other side are still stuck in the doldrums.

4. Why I Am Not a Neoliberal:
So if I'm saying why neoliberalism has such a good track record, why do I not call myself a neoliberal? Well, the answers are rather simple. Neoliberalism has worked quite well across most of the globe for the past 35-40 years and anyone who says otherwise clearly hasn't looked at the history. If it worked for India, Southeast Asia, and parts of East Asia while it was only really tried in Latin American, South Asia, Southeast Asia, and a few other remote locations in Asia; neoliberalism must've worked across a high majority of the places it was tried.

So where are my disagreements with neoliberalism. My disagreements with neoliberalism lie in its assumptions. Neoliberalism works great when you have a geopolitical financial system run by one country in such a manner where all the countries operate by a set of given rules or dictates, where no one tries to screw up the positive-sum game by turning it into a zero-sum game with some neo-mercantilist policies, or where the countries that use neo-mercantilism are so small relative to the size of the total pie that their economic distortions are basically not felt anywhere.

In other words, my qualms with neoliberalism lie in the troubles created primarily by countries like China, Japan, and Germany in the 15 years that has destabilized the global geopolitical financial system. I've discussed the mechanics of the destabilization of these countries and their impacts in other posts which means I won't get into the details on this post. However, we'll notice that these countries are taking up policies to force the US to absorb their trade volatility because the world's reserve currency status forces us to have an uncontrolled capital account.

In other words, the neoliberal doctrine tells us nothing about how we should behave or what we should do when there's other countries taking up explicit policies to undermine the liberalized nature of the system as a tool for the ruling elites in these countries to extract rents from international trade/capital flows. In order to deal with this problem, we need a new way of thinking about things. To put simply: I am not a neoliberal because I do not find the framework suitable to challenging the needs and concerns of today's geopolitical financial system due to the inability of the country operating the system to retaliate against such countries exploiting the system to collect rents.

Other fundamental disagreements I've got with the neoliberal doctrine is in regards to poorer countries with internal development needs and protection. Many economists will cite Ricardo's comparative advantage to say that free trade leads to "more efficient" outcomes, but it's also important to note that Ricardo's theory abstracts away from time and that capital development is a dynamic process that takes time. In other words, maximizing economic efficiency in the short term can cause an overspecialization of a developing economy into its comparative advantage which is generally commodity exports, natural resources, or other extractive industries. Of course, those industries not only do nothing for the development of real capital, but may actually destroy capital by the impacts of shifts in incentive structures or via environmental degradation.

So in order for capital-poor countries to build a capital base, it may be (conditionally) necessary or beneficial to place restrictions on international trade in order to prevent the overspecialization of a developing economy that discourages the development of capital. The neoliberals don't acknowledge this scenario, but it's a fundamental disagreement that I've got with the neoliberal view. With that being said, my suggestion of capital-poor countries possibly finding it beneficial to place restrictions on international trade is a highly conditional suggestion that doesn't hold all the time. Historically, breaking down barriers to trade has had as much a positive impact as placing them. However, note that my suggestion in this regard is heavily conditional.


  1. South korea did not use neolibetslism to advance they used state led interventionist policy including protections and repressed financial system and state led/run investmemt banks directing flows of credit towards certain sectors.

    1. Not entirely correct. South Korea used a variation of the Asian development model that has it's roots in Hamilton's Reports to Congress. That worked until the Asian Financial Crisis in the 90's. Then, South Korea did take up neoliberal reforms (it had no choice).