Measured by the dollar amount involved, the nationalisation of the mortgage guarantors Fannie Mae and Freddie Mac, announced today by the Bush Administration, is the largest in history. No less than $5 trillion of assets and obligations have been taken over by the US government in one hit.
Of course, that debt had long been regarded as having an implicit government guarantee and the companies involved were quangos (in the original sense of quasi-NGOs) rather than genuine private firms. Fannie was a government agency privatised in the 1960s, and Freddie was created to provide competiion for Fannie. So even though the US government will now guarantee virtually all new mortgages, this is more an admission of existing reality than a big step towards socialism.
While the quasi-governmental status of Fannie and Freddie was always problematic, this wasn’t the reason for their failure. Rather, they were pushed to accept increasingly bad loans made by the private sector. And when their difficulties became acute, the most satisfactory solution, under normal conditions, would have been to formalise the government guarantee of the existing loan book, then put them into run-off mode, writing no new business. But given the failure of the private sector, that would, mean, in effect, making it impossible for anyone to write a mortgage contract.
The fact that the credit crisis has reached this point marks the failure of the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state.
In the boom that created this crisis, every part of the financial system (retail banks and mortgage businesses, major Wall Street banks, the financial engineers who designed new securitisation assets, investment funds, ratings agencies and bond insurers) had a major role to play. All have failed miserably, even though most will get to keep the rich rewards they received when things were going well.
Further update As various commentators point out, the failure here is one of actually existing neoliberalism. The “unknown ideal” of a perfect free market system remains pure and unsullied by empirical experience.
More seriously, the significance of the event is not in the marginal change in the status of Fannie and Freddie from quasi-private to quasi-public, but in the abandonment of the pretence that the normal operations of financial markets are capable of cleaning up the mess they have created, even with the liberal helpings of public money that have already been dished out.
John Quiggin 
gerard,
The only reason the “free market” knew they were too big to fail was that … they were too big to fail. The reason they were too big to fail was that they grew to their size and importance because of the government backing of their debt, giving them a huge advantage in issuing debt. They did not need much capital because they were … government backed (and seperately regulated).
No true neoliberal fallacy. Self-sealing fallacy.
Yes and the Republican administration indulges in massive fiscal deficits, expansion of the bureaucracy to solve problems and props up a socialised education system. These are all hallmarks of socialist thinking. Therefore, socialism is responsible for the Iraq war. QED. Anyway, if you want to understand how and why neoliberalism is different from neoconservatism/modern Republicanism, go read some Irving Kristol or something. Just don’t read Klein. I did. I’ll never get that afternoon back.
BBB
To the update,
The only pure free market that I am aware of occured in a large south american shanty town where a cast out community spontaneously created an internal economy completely independently of the base country.
I believe that “perfect free market system” is only possible in the period after a total restart of a community. Similar to the period after the “big bang” when all energy was in a total free state. But this only lasts for a very short period, in real terms, before alignments and associations begin to form (stars and planets), associations that ultimately confine the free nature of the new market, until it is finally fully restrained and the only free trade then occurs between systems. A kind of after glow.
Re #44 The author talks about ‘incentives’. If, as he suggests, the market (system) failure is due to governments not having provided the appropriate incentives, then I am asking the author to now state, preferably in concise terms, what the incentive structure should have been. Further would the author be prepared to acknowledge the obvious, namely providing ‘incentives’ to achieve particular goals is a form of central control, albeit not by explicit commands but by finding an efficient ‘mechanism’.
Comment from the Guardian’s Larry Elliott: Saving Fannie and Freddie was nationalisation pure and simple.
Elliot makes several good points, finally noting that Obama and Gordon Brown are failing to make the most of this political opportunity. The reason IMHO is that supposedly “leftwing” politicians have now moved so far to the right that they have become subservient to the same corporatist elites.
Right is the New Left.
EG,
I think the appropriate incentive is profit. I happily concede your second point.
Daggett – I have never claimed to represent the voices of pure neo-liberalism.
Ernestine – John Quiggins heading suggested we might be witnessing the end of neoliberalism. I think he is stretching way too hard. In fact I think neoliberalism is only just getting it’s boots on and its best years are ahead of it. You seem to be suggesting something different which is perhaps that neoliberalism never existed in the first place.
Daggett – the neoliberal project (if you can call it that) has delivered in spades without being complete. The fact that there are corporate failures along the way does not bother me. Capitalism permits failure which is one of it’s key strengths. Birth and death are natural parts of any ecosystem and the existance of death does not mean an ecosystem is unhealthy.
Ernestine – I advocate limited government. I don’t see this as being in contradiction with your view that there is some theoretical limit to the application of market purity. You don’t seem to profess or advocate a coherently pure alternative to free markets anyway and as such I merely rate you as being a pragmatist who believes in more government than I do. When it comes to specific failures the mathmatical macroeconomic models and constructs don’t prove one way or the other whether the specific failure is due to too much or too little government. I think you imagine too hard that you occupy some intelletual high ground in such matters.
To put the same point as a question. Where do the macro models say how much government is the right amount?
my point Andrew was that Fannie Mae and Freddy Mac’s debt was not explicitly backed by the government – that is what makes these companies different from Ginnie Mae, and that’s what makes it technically incorrect to call these companies ‘publically backed’ when you have a genuinely publically backed company to compare them with. And I suppose it’s like arguing about the chicken and the egg as to whether people believed in the implicit backing because the companies were too big for the government to allow them to fail, or whether the companies grew too big to fail because people believed that the government would never allow them to fail.
of course this raises all sorts of conundrums – if a tree falls in the forest and nobody hears it, does it make a sound? if a private company isn’t publicly backed but everybody believes that the government will rescue it if it fails, it is actually publicly backed?? It seems that the problem is not government backing and regulation per se (as in Ginnie Mae), but rather the moral hazard that goes with an ambiguous situation.
by the way I think it’s important to bear in mind that ‘neoliberalism’ as such never actually existed in the West… I mean if we take neoliberalism to mean a reduction in the amount of government spending as a proportion of GDP, I don’t think that actually occurred in Reagan’s America or Thatcher’s England for example (although I don’t remember where I saw the graphs, it was a while back). There have been changes (to government’s role in social welfare), but overall they have been quite marginal compared with those changes that were experienced by the countries were neoliberalism was fully implemented.
It is only parts of the 3rd world (Latin America and Africa) and the post-Soviet countries, under the demands of the ‘Washington Consensus’ at the IMF and World Bank that actually experienced true ‘neoliberalism’. The results there were absolutely devastating, if you look at the indicators. 90s Russia would be the starkest example. The parts of the 3rd world that escaped the ‘Washington Consensus’ – in East Asia – also happen to be the most successful.
so if i can just get a handle on all this,
1 – capitalism is good cos it destroys things – except when they are too big to be destroyed,
2 -fannie & freddie were not backed by the government –
except fannie & freddie were backed by the government
3 – it was the government fault they failed and were created in the first place –
(for creation circumstances see point one and read grapes of wrath and then if in doubt blame government)
4 – socialism is a bad system –
liberalism is the best but has never had the perfect conditions it needs to demonstrate this obvious truth
5 – if technical economic models diverge from the real world, blame the real world and make the models even more technical and abstract
… clear as mud
The demise of Fannie and Freddie isn’t the end of Neoliberalism. It’s just the beginning. Not-too-clever government policy and regulation provides rich pickings for those who can game the system. Here’s one example: US bond manager Bill Gross made 1.7 US Billion in one day for his clients following the US Treasury bail out of F&F. See FT article http://www.ft.com/cms/s/0/838d3cb4-7e96-11dd-b1af-000077b07658.html.
$1.7 billion profit in one day? Seems like a pretty successful private capital market outcome to me. Too bad for the losers (the US taxpayer).
Troll comment deleted. I’ll do my best to expose the person responsible
BBB, Hitler did all those things, but I wouldn’t call him a socialist. why not call the Republican administration what it actually is – the merging of State and Corporate power (plus a nice measure of bloodthirsty war-making), or “fascism”.
By the way I don’t know which Klein book you wasted an afternoon on. I’ll grant that ‘No Logo’ didn’t live up to the hype, but the Shock Doctrine is one of the most eye-opening books I’ve ever read, and I’m guessing you haven’t read it, but you definitely should.
Troll comment deleted. I’ll do my best to expose the person responsible
Troll comment deleted. I’ll do my best to expose the person responsible
“I mean if we take neoliberalism to mean a reduction in the amount of government spending as a proportion of GDP…”
Which we wouldn’t, because that would overlook all sorts of retreats of government and de-regulations especially in countries where simple transfers continue to constitute a decent slab of expenditure. The changes are not simply in social welfare. They include: financial and labor market deregulation on an epic scale, the gradual elimination of trade barriers, inflation targeting, privatisation of state industry.
“…overall they have been quite marginal compared with those changes that were experienced by the countries were neoliberalism was fully implemented”
Yes, because in the West a lot of what neoliberalism prescribes was baked in during the 18th and 19th centuries. There is a reason that the term is “neoliberal”. When you talk about neoliberalism in Russia, for example, you are not simply talking about a reduction in government spending as a proportion of GDP. You are talking about some of the foundations of modern Western civilisation like enforceable personal property rights.
“The parts of the 3rd world that escaped the ‘Washington Consensus’ – in East Asia – also happen to be the most successful.”
Yes I think China avoided the central tenets of what became the Washington Consensus for quite a while. It didn’t work out too well. China was so bad that just a little neoliberal thinking in the form of the de-collectivisation of the countryside and food supply chains (a profound rejection of socialist thinking) brought massive reductions in human misery. By the way, North Korea is in East Asia. That simple fact makes a mockery of your final sentence. As we all know the neoliberal project also involves an ongoing critique of socialism. In that context your desire to highlight East Asia is bizarre.
BBB
Deleted bogus comment. The person responsible will be permanently banned
gerard, yes it was Shock Doctrine. It was essentially a very long admission that she (a) didn’t know the difference between neoliberalism and neoconservatism (she calls the Cato Institute neocons!) and (b) hadn’t actually read much Milton Friedman.
BBB
bbb, i dont think you’re telling the truth,
because if you’d read it – and by the way, no-one could read it in one afternoon – you would understand that the assessment you just gave of the content of the book is total rubbish
Congratulations, smiths @ 64. You’ve managed to deconsruct capitalism along dialectical materialism lines. I think.
Anyway, I enjoyed it.
#57 We are still focusing on financial markets. Please define profit in an Edworth-box diagram without a box. (I can’t find it). Empirically, the deleveraging that is going on at present in the ‘global economy’is the outcome of profit motivated financial market operators having followed your advice of making profits while in reality confusing private debt (and public debt in the USA) driven financial asset price bubbles with profit – the outcome is a wealth redistribution rather than an increase of wealth for everybody.
#59 I specifed the meaning of ‘neo-liberalism’ using standard economic terminology.
#61 You can’t find an ideological box in which I can be placed and you seem to go out of your way to be honest about it. That is nice but no cliches please about ‘intellectual high ground’ – the so-called sub-prime debacle has one obvious characteristic: people are not strictly risk averse – they borrow until the bubble bursts. So, there is a bit of empirical evidence against the idea of relying on self-regulating financial markets (ie market failure).
Please consult with experts in macro-models on the meaning of ‘size of a government’ (which government – including corporate governants?)
from kenneth rogoff in the guardian, can one of the resident know-alls give a simple answer to this question
The financial sector has produced extraordinary profits, particularly in the Anglophone countries. And, while calculating the size of the financial sector is extremely difficult due to its opaqueness and complexity, official US statistics indicate that financial firms accounted for roughly one-third of American corporate profits in 2006. Multi-million dollar bonuses on Wall Street and in the City of London have become routine, and financial firms have dominated donor lists for all the major political candidates in the 2008 US presidential election.
Why, then, should ordinary taxpayers foot the bill to bail out the financial industry?
For Christ’s sake, that is not a summary of its contents, that is a summary of some essential failings. As for the time it took, fine. An afternoon was just for rhetorical flourish. Call it a weekend, which I guarantee was enough.
BBB
it seems a shame to me, to talk about a book which covers a 40 year timeframe in great detail, and goes into some of the most offensive and saddening activities of the government/corporate elite at the expense of ordinary people everywhere,
and at the end say well she got this and that definition wrong,
i was deeply affected by the conscious pattern of inhumanity and criminality that the book lays out
and i say again what i have said before here,
the content of the book makes the semantic games often played here look callous and sickening,
arguments over petty definitions whilst the people starve and the planet chokes to death,
as the unnamed aide said to suskind
That’s not the way the world really works anymore,” he continued. ”We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality – judiciously, as you will – we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors . . . and you, all of you, will be left to just study what we do.”
That’s because you are not on the receiving end of her errors, smiths.
BBB
BBB, I took neoliberalism to involve a reduction of the government expenditure to GDP as a central plank. of course there are other aspects involved. but I remember being quite surprised when looking at a graph of government expenditure to GDP and noticing that it didn’t go down at all under neoliberalism, contrary to what I would have expected. In fact Reagan’s America massively increased the State sector, but this is somehow obscured by the mythology. What was ‘rolled back’ was not the State, but the measures that the State had traditionally undertaken to protect the poor.
My comparison with the 3rd/2nd world’s experience with neoliberalism and the 1st world’s experience is not about property rights etc. It is the fact that the Washington Consensus demanded that 3rd world countries destroy their state sectors – health and eductation, food and fuel subsidies and industry protections, policies that the 1st world countries have never embraced themselves to anywhere near the same extent (and couldn’t, for one thing the electorates wouldn’t stand for it, and for another they would be economically catastrophic, as they indeed were in Latin America, Africa, Russia and wherever they have been adopted).
As for my comparison of East Asia and Africa/Latin America, I was obviously not including North Korea in the equation (as you were well aware). But to take South Korea as an example – during the 60s, 70s and 80s the government there was heavily involved in the economy – subsidizing and protecting local export-oriented industries, reforming land ownership, tightly regulating capital markets and undertaking huge investments in education and scientific research (in other words, following the same policies that Japan adopted to great success).
The same goes for all the Asian Tigers. The one country in East Asia that fully embraced neoliberalism is the Philippines – which is in the worst condition of any country in the region. Walk through the streets of Manilla and compare it with Seoul. The difference is down to the economic policies that those governments adopted. China has learned the lessons of history. Following the Cultural Revolution its economy has become heavily planned and guided by the State, with strong trade and currency protections. Maoist collectivism is not the only alternative to neoliberalism, although the concept that there are more than two options might be a bit much for your brain to grasp. China absolutely did NOT embrace the Washington Consensus policies – unlike Russia, and look where Russia ended up.
East Asia (primarily South Korea, China and Taiwan) is the ONLY part of the 3rd world that developed economically in the 80s and 90s, precisely because it did not embrace the Washington Consensus policies of allowing their markets to be swamped by imports, giving no assistance to local industries, terminating education and health spending that the African and Latin American countries embraced at enormous human cost. In fact these East Asian countries that developed successfully embraced the exact same Statist policies that allowed the first world to develop. You might not like Klein (although I would be interested in if you could point out any specific errors in the book), so may I suggest you read “Kicking Away the Ladder” by Ha Joon Chang, or “Globalization and its Discontents” by Stiglitz.
i’d rather be on the receiving end of naomi kleins errors than milton freidman’s
the difference between reputation and starvation
Yeah, socialist thinking never hurt anyone! Certainly no one has been starved in the name of leftist ideology. Oh wait…
BBB
Shorter BBB: no conceivable evidence could falsify my belief in free markets as the acme of human achievement.
Shorter shorter BBB: I have an irrational belief, but it makes me feel superior to everybody else.
gerard
Here are the central tenets of the Washington Consensus, stolen shamelessly from Wikipedia (which relies on the seminal John Williamson paper):
(1) Fiscal policy discipline;
(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 prudent oversight of financial institutions; and,
(10) Legal security for property rights.
It’s a fair reflection of the measured nature of neoliberalism, as distinct from pure libertarianism, isn’t it? And you say China adopted none of this over the course of the Deng and post-Deng reform periods? Good grief. Approximately one billion Chinese would beg to differ. How can you ignore the astonishing FDI increases, the significant tariff reductions and the massive importation of capital goods? And those are just the obvious ones.
BBB
gerard,
East Asia developed quickly during that period for a simple reason. The path they were following was already laid out by the developed nations. To go from 10% of the income of a developed nation to 60 or 70% is not difficult if you simply read a few books on open markets. Any errors they made along the way were irrelevant.
Contrast them with, say, South America who tried to develop by excluding or reducing trade (through import substitution) and did not try to push primary education. The difference is instructive.
The “Tigers” performance over the last few years is also instructive. Far from the model you seem to be extolling driving them forward to beat the more open models, their way has stalled. Without a model to follow, there is no known path. My contention, borne out (IMHO) by this is simple (perhaps, in EG’s eyes, simplistic) analogy is that where innovation is required free and open markets and the clear price signals they give are the best, if not the only, way to achieve this.
Trying to use compulsive force (or even strong persuasion) will just shut down innovation.
On your point about the difference between Manila and Seoul – I would strongly disagree with your reasoning. The difference was the legal system. In the Phillipines Marcos was the law and contracts were generally only enforced if they were to his advantage. He also shut down most trade and stole many projects (have a look at the mining industry there, for example). In South Korea Park took a different line – he was corrupt, but he ensured that contracts (particularly those with foreigners) were enforced. Park also ensured law and order were (generally) maintained.
shorter Hal9000,
Nothing will shake my belief that I understand all markets more deeply than all of the people acting in them put together, so that any way in which a government made up of me alone interferes in those market cannot help but to increase the general welfare, ushering in global peace and love to last for a thousand years.
Shorter Hal9000: *crickets*.
Shorter shorter Hal9000: .
BBB
A note on Friedman and Hayek
Both these gentleman have been proven wrong over and over. Krugman systematically disects the intellectual shortcomings of the Austrian school from which Hayek hails (see http://www.slate.com/id/9593). He has also written a devastating critique of Friedman in the New York Review of Books (“Who was Milton Friedman?”http://www.nybooks.com/articles/19857), where he makes the claim that Friedman was “intellectually dishonest” with respect to his role as a public intellectual (as opposed to his role as a professional economist). Jeff Sachs trumps (closet) Austrian adherent Bill Easterly in an argument over the welfare states found in Nordic countries. The simple fact of the matter is that Nordic countries have an extensive welfare state… Hayek believed this would lead to serfdom. It clearly hasn’t. The argument that is often used by conservatives to explain why the welfare state works in Nordic countries is because there is a homogenous culture in those countries (Friedman used this argument in a debate that appeared on Icelandic television – see youtube). This is a flawed argument both intellectually and morally. Intellectually, the argument of both Friedman and Hayek is that the welfare state is never good – homogenous population or not. Morally, it is an admittence that there is significant mistrust of minorities in English speaking countries (as Sachs categorises them) so as to prevent these minorities from attaining very basic standards of living through income redistribution. This is a moral conumdrum, not an economic one.
From a policy perspective, Friedman’s monetarism has failed miserably. Whilst Keynes keeps on keeping on. Neo-keynesians like stiglitz, sachs and krugman have regained the intellectual advantage. Lets hope the likes of Friedman, Hayek and their ragtag group of conservative followers (whether from the Chicago or Austrian traditions) have finally dissappeared from the economic policy landscape. Intellectually, they have got nothing left.
Joseph Clarke @ 44:
‘I’m surprised to see there are still people prepared to apologise for the CRA and pretend that forcing banks to lend could’t possibly have anything to do with a buildup of bad loans.”
I’m surprised you’re still willing ot pretend the CRA was a significant contributory to the current problem when the overwhelming majority of non-conforming loans had nothing to do with the CRA.
I am however unsprised that people right across the political spectrum are determined to seize on the current situation to prove their pre-existing prejudices.
The underlying problem with the Macs seems to be that they succumbed to pressure to accept lower quality assets as security.
In this, they were far from alone in the US housing market.
Market booms and busts are an inherent part of the capitalist economy – the busts are part of the price we pay for the booms and overall higher economic growth, Government policy can to some extent either moderate or exaggerate such booms and busts.
In the case of the US, high government borrowing and spending contributed to the bubble.
In virtually any other country, the international debt and currency markets would have cut off or severely restricted the government’s access to further debt a long tiem ago.
The fact the US was able to keep official interest rates as low as it did for so long and maintain the value of the dollar, is largely attributable to intervention in the market by Asian governments.
Trying to pick all these complexities apart and say simply “this is Government’s fault”
or “this is the market’s fault” strikes me as a futile exercise.
Futile that is on the level of actually advancing our understanding of recent events and identifying policy options ot reduce the risks of a repetition.
But it seems to work quite nicely at reinforcing pre-existing political prejudices.
“And you say China adopted none of this over the course of the Deng and post-Deng reform periods?”
I would hope that you are not in fact so silly as to believe that the alternative to the Washington Consensus is everyone living in Maoist communes. No, of course not. But Deng had a saying – make your way across the river by feeling the stones under your feet. Don’t try and leap across in a single bound, like Russia did, which is what the ‘Washington Consensus’ stands for. And if you actually look at the situation in China, you will see that the State continues to play an enormous role in planning and regulating the economy. It’s a nice list you have, but if you read Stiglitz’s account of his time at the World Bank, and the extreme and fanatical manner that these policies were implemented in practice, you’ll understand what I’m talking about when I use the term. Stiglitz also describes the contrast between the East Asian approach, followed with great success by China, and the types of policies that he was expected to impose as part of ‘Structural Adjustment’.
There is not one country in the world that has industrialized by following the types of policies that the IMF imposed on Africa and Latin America in the 80s. Latin America’s economic performance during its period of ‘bad’ policies in the 50s and 60s was much better than what happened after it started following the advice of the Chicago Boys. As as Ha Joon Chang very convincingly documents in his book ‘Kicking Away the Ladder’ (which I expect that Andrew Reynolds has read), every single country in the world that has successfully industrialized has done so by following policies that the Washington Consensus proscribes. Including import substitution – which South America used during the 50s and 60s but abandoned during its neoliberal period of the 80s and 90s, which was a period of unambiguously WORSE economic outcomes, if you care to look at the figures (Angus Maddison’s the World Economy a Millennial Perspective).
Do you grant that there is, in fact, a contrast between the East Asian model of development – which has involved industry protectionism, import substitution, capital controls, land reform and consequent evening of the distribution of income, and public investments in education and research, verses the ‘Washington Consensus’ policies, which (in practice) have involved open slather on imports, abolition of industry protectionism, cutbacks to health, education and any type of social spending that addresses poverty, no land reform whatsoever, and complete currency market deregulation? There is, in fact, a difference. It is the difference between the performance of the Asian Tigers in the 80s and Latin America’s “Lost Decade”. It is one of the few cases in the social sciences where enough experimental data exists to make a very firm, dare I say “scientific” conclusion. Read Ha Joon Chang’s account, if you haven’t yet.
it is quite absurd to propose that the only difference between South Korea and the Philippines is in their legal system. That may be a factor, but it is ignoring enormous differences in economic policy and the role of the State in the economy which have been absolutely critical, here and everywhere else in economic history. unless you’re saying that we should turn a blind eye to these differences, since they don’t suit your hypothesis.
“The only reason the “free marketâ€? knew they were too big to fail was that … they were too big to fail. The reason they were too big to fail was that they grew to their size and importance because of the government backing of their debt, giving them a huge advantage in issuing debt.” -BBB
This problem of moral hazard exists quite independently of any government guarantee – explicit; implicit or assumed – see for example HIH here in Australia.
Ian, that wasn’t me, that was Andrew Reynolds.
BBB
“paul, are these the neoliberals that are into fiscal deficits and massive expansion of the federal bureaucracy and security apparatus. Those ones? Yeah, not neoliberals.”
This sounds rather like the Trotskyist argument that the Soviet Union wasn’t “real” Communism.
Re. 91 – sorry BBB.
gerard
One of your problems with the Washington Consensus (in practice in the 90s in certain countries anyways) appears to be that it prescribed full-blown neoliberalism over too short a time frame. I am happy to concede that, particularly in places where the fundamental underpinnings of Western civilisation were absent, or where the state was not strong enough or was hopelessly corrupt. This is where the genuine critiques of Shock Therapy ™ have been made.
It’s interesting that you mention import substitution. Of course, South Korea had that but ditched it. Coincidentially (I’m sure) that reform was contemporaneous with substantial improvements in economic outcomes. The opportunity costs of protectionism were simply not big enough to hold back the benefits of an outward-looking trade-based policies and other domestic reforms.
On this topic a very very wise man once said: “…East Asian nations did better as soon as import-substitution strategies were dropped. Take Korea, for example. It had import-substitution. Once it ditched that in the 60s, and went for export-oriented policies, it did much better. The heavy industry interventions of the 1970s, which were coupled with renewed import-substitution policies (particularly in relation to capital goods), are now considered expensive and massive failures. The Korean economic miracle is really one of financial deregulation (foreign capital) and product market liberalisation from the mid-80s onwards.”
and more from another super-genius:
“Starting from a very low base, from the 1960s onwards the South Koreans progessively adopted trade policies that reflected classic neoliberal thinking. This included: an export-oriented industralisation programme that replaced the failed import-substitution regime, a phased long-term reduction in trade barriers (see my other comment above), tighter monetary and fiscal policies, and massive financial market liberalisation, including the abolition of commercial banking controls and restrictions on foreign capital.
Notwithstanding these changes, in some areas South Korea remained (and still remains) a seriously non-neoliberal economy. But it is no answer to the proposition: ‘Neoliberal trade reforms helped create wealth in South Korea’ to say: ‘But South Korea is not a perfect neoliberal country’.”
North Korea still has import substitution policies, by the way.
BBB
Ian,
The problem of moral hazard – in the case of HIH probably n agency issue – is independent of government backing. The price of debt issuance, though, is not, nor are the consequences of failure.
HIH failed as a business but, despite a having a few areas in which it dominated the insurance business the economy did not experience any real issues. Policy holders switched to new insurers and all sailed on quite nicely. Fannie and Freddie are a whole other kettle of fish. They have been distorting markets for years and unwinding all of that will take a while, particularly as the government does not seem to want to let them just fail.
Personally, given the position they are now in, I would prefer that they just be cleanly liquidated (as I advocated on my blog) rather than continuing as the sort of zombies that caused so much damage in Japan over the last decade or more.
Let’s leave North Korea out of it – that has nothing to do with this discussion whatsoever and you are just trying to obscure the issue by bringing it up.
Yes, South Korea had import substitution but “ditched it” – WHEN it’s industries were strong enough to compete in the global market!! That is the critical difference between the ‘developmental state’ strategy and the ‘neoliberal’ strategy – which has never worked anywhere, ever. When a country’s industries are weak and small they need to be protected. Once an industrial base has developed, then they are strong enough to liberalize trade. The key is that this is a gradual process. Great Britain only embraced free-trade when it was the leading industrial power. The US was the world bastion of protectionism until after WW2, when it embraced free trade because there was no competitor that could rival it. It makes a very big difference WHEN you liberalize. you are correct that South Korea, when it had reached a stage of industrialization was able to liberalize to an extent – however if it had never gone through the period of protectionism it would never have industrialized in the first place. One Korean who wrote in detail about this is, as I mentioned, Ha Joon Chang, whose book I hope you find time to read (although judging by your reaction to the Shock Doctrine I don’t think you like reading books that challenge your pre-conceived notions about reality).
it is a red-herring to contrast ‘import substitution’ with ‘export-oriented’ policies. They are not alternative strategies, they are often, in fact, two sides of the same coin. The Asian countries did both – protecting industries from foreign competition which were in fact the same industries with large markets for export. Industries oriented toward exports cannot develop if, in their infancy, they must compete against fully fledged foreign industries. I find it ridiculous that anyone can call Korea’s economic policies in the 70s “massive failures”; there is nary a country in the world that achieved so much development during that period time. For “massive failure” refer to the long list of 3rd world countries that have adopted IMF policies and the dreadful consequences.
As for currency/financial controls – South Korea had extremely tight control over capital flight during its period of rapid development. In the 90s it did liberalize these in line with prevailing Washington Consensus wisdom. The result was the economic catastrophe of the Asian Financial crisis in 1997, which was utterly devastating to the South Korean economy. As Stiglitz pointed out in his book – the three Asian countries that did NOT liberalize their capital markets, China, India and Taiwan, were the three Asian countries that were spared the worst of that financial crisis.
“As for currency/financial controls – South Korea had extremely tight control over capital flight during its period of rapid development.”
By ‘extremely tight’, I mean they actually had the death penalty for unauthorized transfers of money out of the country!
“When a country’s industries are weak and small they need to be protected. Once an industrial base has developed, then they are strong enough to liberalize trade. The key is that this is a gradual process. Great Britain only embraced free-trade when it was the leading industrial power.”
Two points:
1. Pretty much every protected industry in history has used the “infant industry argument”. The first Australian (as opposed to state) tariff was introduced to the protect the textile, clothing and footware sector and the automotive industry. It was justified on an infant industry basis, 90-odd years later, the most tariff-protected industry sectors in Australia are the TCF and automotive industries.
I’m not saying infant industry protection is never justified but it’s frequently abused.
2. Britain adopted free trade (to some extent) at home and demanded it of various weaker countries in Europe and South America. But it used discriminatory tariffs and other measures *such as currency restrictions) to severely limit trade between other European powers and the British colonies and deliver monopoly profits to British firms.
After all, what was the point of making it illegal for the Indians to manufacture their own cloth if you had to worry about French and German competition?
The attempts by the free market fundamentalists to defend their ideology seem astonishingly feeble, once again.
TerjeP (@ #58, #60), I would have thought that ‘neo-liberal purist’ would have been an accurate label for someone who, as each new catastrophe of what the rest of us regard as the ‘free market’ system unfolds, pleads that the system is, in fact, tainted by the existence of government somewhere in the Universe.
If it is not, could you tell me what you consider a more appropriate label?
Also, could you please provide us with a list of what you consider to be ‘free market’ successes of recent decades, and while you are at it, could you also provide a list of ‘free market’ successes of the 1920’s, which, as we all know led to such boundless happiness, prosperity, peace and harmony through the 1930’s and 1940’s?
Also, you still haven’t told me whether or not you have read any of the “Shock Doctrine”. I would love you to explain to me how the Pentagon socialists managed, against Rumsfeld’s best efforts, to keep socialism intact in the U.S. armed forces long enough for them to be able to cause catastrophe in Iraq (see #33).
Or do you maintain that, contrary to the impression that his speech of 10 Sep 2001 might have given, Rumsfeld was, himself, in fact, secretly in league with the Pentagon socialists?