The end of neo-liberalism?

http://www.bworldonline.com/BW071008/content.php?id=144


The end of neo-liberalism?

By Joseph E. Stiglitz
First Published: July 7, 2008
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.

Joseph E. Stiglitz, Professor at Columbia University , 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. This
commentary is published by Daily News Egypt in collaboration with Project
Syndicate