by Colin Teese
The experiment of globalisation, and the policies that sustain it, are pretty much stressed out. This marks the second failure of globalisation. The first, in the late 19th century, also failed.
Yet, despite its earlier failure, globalisation did make a comeback. In the year 2000, U.S. think tank the Centre for Economic and Policy Research (CEPR) made clear that the 1980s experiment with what we now call “neoliberalism” had already failed in its primary objective of lifting world output per worker. At that time, it was called the “Washington Consensus”, an economic policy experiment enthusiastically promoted jointly by the United States Treasury, the International Monetary Fund (IMF) and the World Bank.
Surprisingly, it is still with us. Of course, it has powerful backers: elite policymakers in most Western countries, international economic agencies, and the economists and business leaders advising them. When it comes to dissenting voices, this powerful brigade simply closes their eyes to uncomfortable facts.
U.S. Deputy Secretary of the Treasury (later Secretary) Larry Summers, one of neoliberalism’s most powerful defenders, makes this clear: “When history books are written 200 years from now about the last two decades of the 20th century, I am convinced that the end of the Cold War will be the second story. The first story will be about the appearance of emerging markets – about the fact that developing countries, where more than three billion people live, have moved towards the market and seen rapid growth in incomes.”
The only developing country to which this description could possibly apply is China. Unhappily for Summers, Chinese prosperity in the last two decades of the 20th century was delivered by a communist-led government determined to control markets.
The failed neoliberalism/globalisation experiment found its most influential champion in U.S. President Ronald Reagan. In Reagan’s view (or those advising him), what was needed was an economic and social program emphasising that government interventions, of the kind that had prevailed between the end of World War II and the early 1970s, were unhelpful.
Economic management based on light touch regulation, would deliver the best outcomes. Government interference, in the President’s own words, was “part of the problem, not the solution”.
It helped that the President was doing no more than supporting what had become the current orthodoxy within the economic academy pretty much across the Western world.
The aim of the new policies was to sweep away much of the financial and other advantages that had accrued to wage and salary earners. The new economics of course found favour with Western business communities, but also, more surprisingly, on the progressive side of politics – parties whose previous purpose had been to defend the interests of lower-paid workers.
In the case of Australia, the entire neoliberal experiment was enthusiastically ushered in by Labour governments led by Bob Hawke and Paul Keating.
The consequence was to reverse policies that had been framed in the immediate postwar period, across the Western economies. Policies that had brought about a fundamental shift in wealth distribution – away from the owners of capital, and towards wage and salary earners, largely by means of a fundamental shift in the burden of tax.
After World War II, the highest marginal tax rates were set at up to 90 per cent for the highest incomes and inheritance taxes were introduced. Overall, these changes resulted in a huge shift in wealth distribution.
In the circumstances of the time, even conservative governments went along with such radical changes, driven by the then perceived threat posed by international communism. Rightly or not, Western capitalist governments believed that, to neutralise this threat, it was necessary to support policies that would provide permanent, well-paid jobs for all workers in the Western world.
By the 1970s, circumstances had changed. The communist threat had diminished. What might easily have been called the Reagan/Thatcher revolution (British Prime Minister Margaret Thatcher was part of it) promised a brighter future for everyone, by discarding many core ideas upon which postwar prosperity had been built.
The Republican Party, with Reagan at its head, was totally committed to the new policies. It was not alone. A movement was fast developing within the United States, driven by political and economic elite institutions, that would become known worldwide as the Washington Consensus.
A prescription for the reorganisation of economic activity quickly captured imaginations, in greater or lesser measure, throughout the Western world. It was underpinned by a few fundamental but absolutely critical policy changes: privatisation of public utilities; unimpeded movement of goods, services, capital and people across national borders; and minimal interference with the operation of markets; all supported by newly agreed, internationally enforced rules. This, it was claimed, would deliver greater economic output and prosperity to rich and poor.
CEPR destroyed this image. It showed that from 1960 to 1980, on average across countries, output per person grew by 83 per cent. By contrast, from 1980 to 2000, growth in output per person grew by 33 per cent.
A deeper comparison showed that more than 75 per cent of countries (89 in total) saw their total per capita growth rate fall by at least five percentage points.
In Latin America, per capita income grew by 75 per cent from 1960 to 1980, and from 1980 to 2000 by only 6 per cent. Mexico and Brazil would have been twice as rich if their 1960-80 economic performance had continued for 1980-2000.
Only India and China, which did not follow the Washington Consensus, did better in this period, along with nations of East Asia that rode the rise of these two countries. Indeed, China exploited aspects of the capitalist system to develop their own form of capitalism on steroids.
The CEPR concluded that the World Bank and the IMF can point to no other regions of the world that did better by adopting the policies of neoliberalism that they so strongly promoted.
These facts were not widely known at the time, although among globalism’s staunch defenders they were fiercely contested. Even though they could not contradict the facts.
Now, 20 more years on, the facts on falling global output have worsened. Despite this, the propositions supporting a failed globalisation experiment have been kept alive. The great champions of the idea, The U.S. Treasury, the World Bank and the IMF, along with all Western policymaking elites, don’t talk much about it but they resist all propositions for change. So do most economics departments in Western universities.
From the beginning, evidence that globalisation was not delivering better outcomes was simply ignored. Or, alternatively, and enduringly, myths were created and propagated.
Margaret Thatcher asserted that there was no alternative. Ronald Reagan continued to maintain that government was part of the problem. Interestingly this did not preclude either from the single-minded pursuit of government.
Then there were those who maintained that globalisation was simply a function of advances in transportation and communications – as natural in the evolutionary process as electric light replacing candles. This was never true. Globalisation grew out of our leaders writing rules that made it possible to drive down wages and end job security.
Whatever one might think about the policy, it was a conscious political choice that voters were persuaded to embrace on the basis of the belief that it would produce huge gains in prosperity.
In this context there is a question worth asking. If it can be to all our benefit to import goods from low-wage countries, even if it harms our workers, why is not the same true of professional classes?
Take doctors. Why do we not import already trained doctors in such numbers as would push down doctor cost and so reduce health costs without any diminution of quality? The same goes for other professions whose practitioners could be exposed to international competition with similar cost benefits.
The answer is simple. All of these professions are defended by powerful professional bodies (in effect, unions), protections that, under globalisation, are denied lower-paid wage and salary earners.
Then there is the matter of international trade. Much has been made of its growth in the globalisation era. But U.S. research has revealed that 39 per cent of wage inequality from 1973-93 has resulted from increased international trade. Largely, this is because employers had the power to threaten to take production offshore if workers did not accept low wages, or, because the businesses went offshore anyway.
In the U.S. (and it is much the same here) over the period from 1980 to 2000, wage earners did not share in the gains from economic growth, as compared with the earlier period during which foreign trade and investment was a much smaller part of the U.S. economy.
The situation has become even worse in the second decade of the 21st century; there has really been no clear emergence from the 2008-09 global financial crisis.
The economic shutdown associated with covid19 has exposed the problem. Economies already in serious decline before the virus will not simply return to normal, assuming we get the virus under control. A post-covid19 world will not snap back to what we had before. In Australia’s case, the economy was trapped in stagnant growth and heading towards recession.
In addition, it is now clear we face the geostrategic necessity of reshaping our economy to meet the challenge of an increasingly hostile relationship with China.
The real worry for our political class is not how we can engineer a “snapback” to normality, but something much more challenging: how to break clear of the shackles of deep globalisation, while at the same time reshaping our economy to meet the rising challenge of China.
We must make sure our politicians are up to it!
Colin Teese is a former deputy secretary of the Department of Trade.