Distracted by the war in Ukraine, and then a holiday, I have not commented on economics for quite a while. And yet economic developments over the last few months have been dramatic. Inflation, long dormant in the developed world, is rising after more than two decades of quiescence; growth is stalling. The expected bounce-back from the covid-19 pandemic is not happening. Given my longer period of silence on this, I am going to take a longer perspective than usual.
One of the most striking things about the politics of the last decade or so is the backlash against the global economic liberalisation of the 1990s and early 2000s. The left labels this liberalisation as “neoliberalism”, the right prefers “globalisation”. Both lay all society’s ills at its door (perhaps that’s not fair on the right, some of whom add “wokeism” to the world’s evils). The left emphasises rising inequality within countries, with the rise of a fabulously rich elite while many struggle to make ends meet. The right would rather emphasis the dislocation of working class communities and values as economic change takes it toll, and especially the movement of peoples and the consequent mixing of cultures. Both have a point. But they overlook the many benefits that global liberalisation has brought. There has been an unprecedented closing of the gap between rich and poor nations, as countries like China and India exploit the opportunities of global trade. Developed countries have experienced a flexibility of supply that has ensured the stability of prices, and eased the process of technological development which in turn has has brought the world mobile phones and much else that has transformed life in so many ways. Along with these came an assumption of perpetual economic growth.
But now the liberalisation is going into reverse. We can take Russia’s war on Ukraine an extreme result of this – it is part of Russia’s rejection of globalisation in a search for national identity, sovereignty and prestige. But the signs are everywhere: America’s trade wars with China and Britain’s rejection of the European Union are but two examples. Just to show that this is trend is global we can add China’s extreme policies to fight the pandemic, which involve its physical isolation, as another case in point. The inflation crisis is one result. Economic policy makers are dealing with unfamiliar problems. Flexibility of global supply chains had been hard-wired into the way they viewed the world. Interest rates were kept low; many countries exploited the ease with which government budget deficits could be maintained. There was almost no such thing as fiscal or monetary policy being too loose, as global supply could respond to almost any level of domestic demand, or so it seemed. Now this comfortable world is gone. Policymakers must now manage think about the sustainability of supply alongside the level of supply. Retrenchment of some sort, though higher interest rates or tighter fiscal policy, looks inevitable.
The first thing to understand about all this is that the ending of the era of globalisation is not just the result of a political backlash. It follows a change of global economic conditions. The most important, and yet least acknowledged, is global convergence. Behind the success of globalisation was a huge global opportunity. In Asia vast numbers of people were engaged in massively unproductive agricultural activity. As these people were moved to more productive activities, especially in manufacturing, world productivity advanced. Japan led the way, followed by South Korea, Taiwan and others, but China’s impact has dwarfed all of these – indeed Deng Xioaping’s application of neoliberalism with Chinese characteristics has been more transformative of the world economy than any single Western country’s policies. Global trade was essential to making all this happen, as the developing economies were able to export surplus production, and developed economies experienced the benefits of cheap imports as a result. But this is largely played out. The main population shifts in China and East Asia have happened, and these countries are experiencing a demographic transition too, as population growth goes into reverse. Other less developed economies have potential (notably South Asia and Africa), but the gains here are harder to unlock, and must be spread more widely, now that there are many more developed economies. The potential gains from global trade, at least for fully developed economies, as well as China’s, have diminished drastically.
Other trends can be added to this. Demographic change in the developed world and China is widely acknowledged, even if its full consequences are rarely given due weight. There are other factors, which I have talked about in this blog. The saturation effect of developed economies, as a growing proportion of spending moves from fulfilling physical needs to status goods, and the not unrelated Baumol effect as a growing share of economic activity moves into activities that are not susceptible to productivity gains. The overall conclusion is clear: economic growth, in the way that we have generally understood it, is over. That is not to say that wellbeing cannot be improved and poverty reduced – but doing so will require much more attention to the distributional effects of policies, and much of the achievement will be through “soft” quality of life effects, rather than increased individual consumption.
But we can’t abandon economic liberalism. Economic efficiency is still important. In fact it is more important than ever as we need to make the most out limited resources. In many contexts the efficiency of the market economy and private capital cannot be improved on. We still need capitalism, but it has to be better managed. Meanwhile the challenges posed by environmental change and demography mean that society must endure more disruption, of the sort that many on the right will resist. Immigration into developed countries remains necessary; we must reduce our carbon footprint by reducing car use and building wind farms in our backyards.
But liberals must face up to a number of challenges. Firstly monopoly capitalism and excessive corporate power must be confronted and managed. Second, excessive levels of wealth and income must be taxed and redistributed. This requires more international cooperation, especially around the closing of tax havens, and pushing the boundaries of privacy rights. Third, the pubic sector must be better managed, with solutions tailored to individual people rather than being the subject of organisational empires. This implies more devolved decision-taking in the public realm, but within a culture of openness and adherence to the rule of law to keep corruption at bay. And fourth we need more democracy – not just voting but meaningful public engagement and consultation – especially at a local level. All of these things run counter to the model of neoliberalism developed in the 1980s and dominant in the following decades in the West. There is a growing common ground between liberals and socialists, though movement is required by the latter too if this is to work.
The era of neoliberalism brought huge economic benefits, and the world is missing them now that era is over, even if neoliberalism brought many problems with it. But that is mainly because economic conditions have changed, and we have new economic priorities. We need a a new understanding of economic liberalism in order to take human society forward.