The world economic crisis accelerates the shift toward capitalism

Doc Merlin just left this comment in the post on the German elections:

Keep doing these posts, if only for the reason that Socialists and pessimistic libertarians will always be with us, and need to be shown wrong constantly.

OK, let’s consider the objections raised by those awful pessimists and socialists.  One argument is that these elections don’t mean what I think they mean.  Just because a particular party wins, and just because the stock market is enthusiastic, doesn’t mean reforms actually occur.  And that is the bottom line—are market reforms continuing?  Unfortunately this quotation from The Economist doesn’t use the term “market reforms” but in context it seems to me that that is what they are talking about:

WITH falling sales, rising public indebtedness and surging anti-business sentiment, the past year has been a tough one both for business people and for pro-business policymakers. “It is not just a crisis of the economy,” says Mahmoud Mohieldin, Egypt’s minister of investment. “It is a crisis of economic thinking. It is a crisis that is confusing many reformers.”

Even so, the World Bank’s annual Doing Business report*, which tracks changes to the regulations that affect business, suggests that governments have handled the storm well. In the year since June 2008, 131 countries introduced 287 pro-business reforms””20% more than in the previous 12 months and more than in any year since the World Bank started the survey in 2004.

.   .   .

Encouragingly, reform seems to be contagious. Countries try to emulate leaders in their regions. Many African governments, for example, have taken note of the success of Mauritius’s deregulated economy. They also respond to competition. Germany introduced laws to make it easier to establish joint-stock companies, scrapping ancient regulations, because so many German companies were taking advantage of the single European market and incorporating in Britain. Amazingly, given the fiscal pressure on governments, only one country increased its corporate income-tax rate: Lithuania, from 15% to 20%.

How much does all this reform matter? A good deal, according to a growing body of academic literature (so far there are 405 articles in academic journals and 1,143 working papers devoted to studying the impact of the Doing Business reforms).

And it isn’t just the basket cases, the two most free market economies keep getting freer:

The best reformers have several things in common. Their reforms are part of a broad agenda of boosting competitiveness. Over the past five years such pace-setters as Rwanda, Egypt, Colombia and Malaysia have each implemented at least 19 reforms. And they never stop. Those paragons Hong Kong and Singapore introduce substantial reforms each year.

At first I thought the crisis would be just a temporary setback for neoliberalism.  But I was wrong, it wasn’t even a temporary setback.  Yes, the US isn’t doing well, but there are 199 more countries out there.  We Americans can’t ignore these worldwide trends forever.Part 2.

Some pessimists kept insisting that the good news out of Switzerland didn’t mean anything, as Switzerland is special in all sorts of ways.  OK, let’s look at one of the least Swiss-like countries in the world, Indonesia.  They recently became more democratic, and (perhaps as a result) embarked on a radical program of decentralization.  According to The Economist, here is how it is going:

THE Suharto regime used to argue that if East Timor became independent, it would set off an archipelagic chain reaction. So when in 1999 East Timor voted for independence, Indonesian soldiers and their local allies responded with a furious burst of arson and violence. With this disaster coming so soon after the Indonesian economy collapsed, there were fears that Indonesia might unravel. To make matters worse, an ethnically, linguistically and culturally diverse archipelago was dominated by Java and the Javanese. It still is.

The response to the resentments and frictions left behind by the Suharto years included one of the most ambitious decentralisation programmes attempted anywhere. In the first stage of this, in 2001, the two provinces with the strongest claim to statehood””Papua (since divided into two provinces, Papua and West Papua) and Aceh””were granted enhanced autonomy.

Meanwhile resources and responsibilities were transferred from central government to subnational ones””primarily provinces and kabupaten, or districts””which became responsible for most public services. From 2005 direct elections were introduced both for provincial governors and heads of districts (bupatis) and municipalities (mayors), creating a new breed of accountable local officials with their own constituencies.

Indonesia’s current integrity as a country is a tribute to these policies. Devolution may also have helped restore a degree of social harmony in places such as Poso (in Sulawesi) and Ambon (in Maluku) which had been riven by sectarian violence between Muslims and Christians.

One of the proudest achievements of the first Yudhoyono administration was the 2005 accord that ended the long-running secessionist war in Aceh. The rebels abandoned the fight for independence in exchange for a role in the politics of an autonomous Aceh.

Yes, it is a much longer article and The Economist does mention many other problems, including some that are more difficult to address with a weak central government.  I would argue that that’s partly because tax collection is still far too centralized, so the provinces depend on the central government for revenues.  But The Economist does seem pleasantly surprised that a country of 220,000,000 mostly poor Moslems, Christians and Hindus, which is incredibly diverse and spread out over 3000 islands, has not fractured apart.  Instead, democracy and decentralization have made it more stable.

Some people say we can’t trust the people to govern themselves.  I say we can’t trust dictators like Suharto to govern countries of 220,000,000 people.


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22 Responses to “The world economic crisis accelerates the shift toward capitalism”

  1. Gravatar of Thorfinn Thorfinn
    5. October 2009 at 18:04

    The Economist report is quite welcome to my awful pessimist ears (though the only study I know of that looks at those indicators–Commander and Svejnar (2007)–finds no robust effect of these indicators on growth).

    But if the best you can say about Indonesia’s decentralization (which was a very messy and ambiguous process) is that it avoided some awful counterfactual chaos that Indonesia has never seen nor is common among countries in its income range, well that says it all. Even if devolution did lower social tension (which I’m willing to believe), that doesn’t mean much when looking at stable countries.

  2. Gravatar of Current Current
    6. October 2009 at 01:31

    The report from “The Economist” says that “131 countries introduced 287 pro-business reforms” (the report mentions 27 anti-business reforms too), which is fair enough. But, what do the World Bank and The Economist mean by “pro-business”? Does that mean “pro-free-market” or does it mean “pro-corporatism”? That isn’t clear.

    Also, I don’t think the report measures everything important. For example the Doing Business report describes a UK reform: “The United Kingdom eased the process of dealing with construction permits with wider use of approved inspectors, reducing the time and number of steps required. The lodging of a land transaction return is now processed automatically and electronically by the revenue and customs authority, reducing the time to register property.” That is probably true, however, getting a construction permit in the UK isn’t the problem with construction. The problem is getting planning permission, and that often requires spending years wading through a complex bureaucratic process. It’s not useful to measure the time to get construction permits in absence of the time to get other certificates.

    Also, the example of Indonesia decentralizing some power is hardly indicative of a general trend. How many other countries have decentralized compared to how many have become more centralized?

    What interests me about decentralization is the question: How does it come about? Alexis De Tocqueville wrote: “In France there is only one thing we cannot make: a free government; and only one that we cannot destroy: centralization”

    The problem, as De Tocqueville explained, is that the incumbent government benefit from centralization. But also, revolutionaries and other potential governments benefit from it similarly, because it means there is only one power that they must take over in order to control a country. So, how is it done? I’d be very interested to find out.

  3. Gravatar of Current Current
    6. October 2009 at 03:38

    Here is an interesting article by someone on the left about their recent fate, if anyone is interested…

    http://crookedtimber.org/2009/10/05/twilight-of-the-reds-pinks/#more-13243

    (What happens if you tie the balloon to the ice-cream cart?)

  4. Gravatar of johnleemk johnleemk
    6. October 2009 at 08:47

    “But if the best you can say about Indonesia’s decentralization (which was a very messy and ambiguous process) is that it avoided some awful counterfactual chaos that Indonesia has never seen nor is common among countries in its income range, well that says it all.”

    Ummmmmmmmm…how much do you know about Indonesia? I come from the region, and believe me, the country is improving substantially. I don’t know how much of this is attributable to decentralisation, but Indonesia is significantly more democratic than its peers in the region. Police protect demonstrators in Jakarta, while in Kuala Lumpur the police gas them, and in Singapore people are too afraid to even demonstrate. In tandem with democratisation, the Indonesian economy seems to be improving.

    I’m young, but I still remember when Indonesia was thought of as some godforsaken land of repression and stagnation under Suharto. Suharto only came to power after a bloody coup, when ethnic and religious minorities were subjected to genocide in the name of purging communists: http://en.wikipedia.org/wiki/Indonesian_killings_of_1965%E2%80%9366 That was real chaos. But the situation in Aceh was pretty bad too until reforms took place: http://en.wikipedia.org/wiki/Insurgency_in_Aceh

    Nowadays in Southeast Asia, it’s fairly common to think that Indonesia may well surpass Malaysia over the next couple of decades if current trends continue. And I don’t think it’s a huge stretch to credit the Indonesian government’s reforms for much of this success in altering the trend lines.

  5. Gravatar of Rafael Rafael
    6. October 2009 at 09:16

    The trend can be more liberal policies, however, in Latin America, especially in Brazil, we are experiencing interventionist policies (not to mention Chavez, Rafael Correa and Evo Morales). Since Lula´s second term, heterodox economists have had more space in the policy arena (the secretary for economic policy is a quasi-famous post-keynesian economist – Nelson Barbosa – he has lots os published papers in the JPKE).

    The fact is that as Brazil is starting to grow fast again, such interventionist policies are taking the credit. Both candidates to next year´s election are pro-big government nationalists.

    Furthermore, the 90s reforms came with several crisis, which makes an association between reforms and crisis easy to do.

  6. Gravatar of Bill Woolsey Bill Woolsey
    6. October 2009 at 09:41

    Rafael:

    Voce pode me mandar um email?

    wwoolsey@comcast.net

    Onde voce mora? Qual cidade?

    Bill Woolsey

  7. Gravatar of ssumner ssumner
    6. October 2009 at 11:52

    Thorfinn You said;

    “awful counterfactual chaos that Indonesia has never seen”

    Define “awful.” Weren’t 100,000 Chinese killed in riots in the 1960s? The death toll in East Timor was horrendous. And there was trouble in Aceh. Yes, other countries have seen worse, but I do think things are progressing. Even so, I’ll admit that the changes are at the margin, Indonesia has lot’s of other problems and I certainly don’t expect it to look like Switzerland anytime soon. Indeed I think fighting continues in Papau, and other problems will probably flare up. I was mainly reporting The Economist’s impressions, for what they are worth.

    I respect your thoughtful skepticism, I’m just trying to provide the “glass half full” perspective that you won’t find in the NYT.

    Current, I alluded to the ambiguity over “reform” but I’ll still wager that I am right. Most NGOs that do these surveys are fairly idealistic, they don’t typically favor pro-corporate policies that aid rent-seeking. So although I may be wrong, I’ll wager that if anyone checks it out they are mostly good reforms, not special protection for companies.

    You said;

    “Also, the example of Indonesia decentralizing some power is hardly indicative of a general trend. How many other countries have decentralized compared to how many have become more centralized?”

    I agree, it’s only one country, but that wasn’t my point. My point was that the Economist magazine said it made things marginally better. I was addressing the complaint that it worked in Switzerland, but wouldn’t work elsewhere.

    Current#2, Or maybe voters understand that socialism doesn’t work.

    Thanks Johnleemk, That confirms what I thought. The only area I disagree is Malaysia, I just don’t see Indonesia catching up soon. But I wish them well.

    Rafael, Good points. But wasn’t Lula pretty neoliberal in his first term? In addition, I read that the progress against poverty actually started under the pre-Lula government, and that as a result that government won a surprising share of the poor voters in the race they lost to Lula. But obviously neoliberalism is a tough sell in latin America, except perhaps Chile, where it has worked relatively well.

    (Come to think of it, Chile is also the country that did the most free market reforms, so maybe the voters should pay attention to that correlation.)

    Bill, You speak Portuguese? BTW, I think Marcus is also Brazilian.

  8. Gravatar of Current Current
    6. October 2009 at 13:28

    Scott: “I alluded to the ambiguity over “reform” but I’ll still wager that I am right. Most NGOs that do these surveys are fairly idealistic, they don’t typically favor pro-corporate policies that aid rent-seeking. So although I may be wrong, I’ll wager that if anyone checks it out they are mostly good reforms, not special protection for companies.”

    You’re calling the World Bank idealistic?!? Or is that a joke? I thought you believed in “democracy”. The world bank are an unelected bureaucracy as are the IMF. It’s like calling the British East India company idealistic.

    Besides, if those at the World Bank understood these sort of thing then why would they be working at the World Bank? The World Bank are an institution dedicated to directing capital to highly dubious ends in developing countries which are often very corrupt.

    If they understood that what they were doing was bad then they would do something else. Or perhaps walk outside and shoot themselves in the car park, I think that’s what I would do if I worked for the World Bank. So, I don’t trust their research because if they understand the situation they’re evil cynics and if they don’t they’re idiots and not competent to research this.

  9. Gravatar of Philo Philo
    7. October 2009 at 06:52

    “At first I thought the crisis would be just a temporary setback for neoliberalism. But I was wrong, it wasn’t even a temporary setback.” Many observers, including me, and including those hostile to neoliberalism, shared your expectation. Why were we all wrong? What actually explains the resurgence of neoliberalism, when most commentators attribute the crisis to over-reliance on free markets (“greed,” etc.)? (Maybe you’re exaggerating, and ‘resurgence’ is too strong a word. Still, I expected much worse than we’re seeing.)

  10. Gravatar of Current Current
    7. October 2009 at 07:44

    Philo: “over-reliance on free markets (‘greed,’ etc.)?”

    I wonder if that argument has been counterproductive for the left. Everyone interested in politics has heard it before, many understand it’s problems at a simple level. Or they at least worry that “anti-greed” policies may not work.

  11. Gravatar of Rafael Rafael
    7. October 2009 at 10:18

    Scott,

    Yes, Lula is following the inflation target regime. Also, the Debt/GDP ratio has decreased until the crisis (it´s responsible for investment grade to our sovereign debt). But heterodox economists keep saying every day in brazilian newspapers that high interest rates and appreciated fx rate hinders growth and more technology intensive exports (but they don´t know what they´re talking about).

    The recession has affected heavily the fiscal balance, beacuse of tax cuts for autos, electronics and lower economic activity. But, it would be easier if government spending with its employee didn´t grow so much.

    About the reforms: Lula doesn´t like them. Almost nothing has been made about social security or payroll taxes. Changing the brazilian social security seems to be comparable to changing health care in the US.

  12. Gravatar of Current Current
    7. October 2009 at 10:42

    Rafael: “more technology intensive exports”

    In my job I have encountered the strange behaviour of the Brazilian government towards the international electronics industry.

  13. Gravatar of ssumner ssumner
    8. October 2009 at 06:01

    current; You said;

    “You’re calling the World Bank idealistic?!? Or is that a joke? I thought you believed in “democracy”. The world bank are an unelected bureaucracy as are the IMF. It’s like calling the British East India company idealistic.”

    I’ve known people who work there, they are idealistic. The only way you’ll change my mind is if you find out the World Bank is encouraging trade barriers, price controls, monopolies etc. I still think I am right.

    Philo, Think about the meaning of the word “reform.” In the 1930s the term almost always meant more statism. Ever since 1980 the term (when used in magazines like The Economist, or newspapers like the NYT, WSJ, FT, etc), usually means free market reforms, especially when applied to developing countries. So contrary to what Current claims, when a developing country gets into trouble, the international organizations now usually suggest market reforms. This mindset is so deeply ingrained, that even this crisis couldn’t shake it. Neoliberalism has many decades more to run. The developing world still needs massive reform of they economies.

    Rafael, I agree, and Brazil has a big problem with too much government. Too many employees, too much government pensions, etc.

  14. Gravatar of Current Current
    8. October 2009 at 07:34

    Scott: “I’ve known people who work there, they are idealistic. The only way you’ll change my mind is if you find out the World Bank is encouraging trade barriers, price controls, monopolies etc. I still think I am right.”

    Haven’t you read Joe Stiglitz’s book on this subject?

    I’m not disagreeing with you that the World Bank advise Neo-Liberal policies, they do and I agree with that. That doesn’t stop them being evil.

    Here is what the IMF and the World Bank do:
    1) Find an African dictator of some sort.
    2) Lend him money for some scheme.
    3) African dictator takes money and deposits in Switz bank account.
    4) African dictator (or his successor) taxes the people he rules and confiscates their property to pay the loan back.

    I understand that the World Bank and IMF staff get kickbacks from the dictators and from commercial banks. And of course the developed world love it because it ensures the developing world stays poor and keeps down raw materials prices.

    Scott: “So contrary to what Current claims, when a developing country gets into trouble, the international organizations now usually suggest market reforms.”

    More accurately they force market reforms on developing countries.

    Now, if you are really a supporter of democracy why do you support this? Why should the Swiss get democracy and the developing world get forced into things by unelected international bureaucrats?

    How is paternalism in general ever consistent with free-market economic policies?

  15. Gravatar of StatsGuy StatsGuy
    8. October 2009 at 07:55

    I have to agree with Current on a few things:

    – What do you mean by capitalism? What type of capitalism? Do you mean capitalism in contrast with (???)? At the same time that we’re accelerating the shift to capitalism, social expenditure budgets as a percentage of world GDP appear to be rising in many places. Is that capitalism?

    – What does the world bank mean by pro-business? Is anti-trust regulation pro-business, or anti-business? Is a gasoline tax anti-business? What if coupled with lower income taxes? Are R&D subsidies pro or anti-business? Are directed investment tax credits (which are funded by running govt. debt or raising taxes elsewhere) pro-business? Is health reform in the US pro-business (by lowering unit labor costs) or anti-business? Is ramping up SEC anti-fraud enforcement pro or anti business?

    I’m not arguing against your premise. I just don’t think the question is more or less capitalism anymore. I think it’s “what kind of capitalism”, as Current argues earlier.

  16. Gravatar of Doc Merlin Doc Merlin
    8. October 2009 at 11:10

    Hrm, I liked your response. In my own experience when I was young, no one I knew was a communist or a socialist. Now, I know plenty of socialists and communists my own age. Is this a result of entering academia, and they were always with us? Or, is it as society moves towards the free market (as you are saying it is) these people are relegated more towards fringe and thus try harder to self identify according to their beliefs?

    Some combination of both?

  17. Gravatar of Philo Philo
    10. October 2009 at 19:20

    “[W]hen a developing country gets into trouble, the international organizations now usually suggest market reforms.” OK, so neoliberalism is still popular with the international organizations. But why is it popular with the voters, in developed as well as in developing countries?

  18. Gravatar of Current Current
    11. October 2009 at 03:27

    Philo: “OK, so neoliberalism is still popular with the international organizations. But why is it popular with the voters, in developed as well as in developing countries?”

    Do you mean “neoliberalism” in the normal sense of modernized classical liberalism. Or do you mean it in Scott’s odd sense that includes Switzerland and Denmark?

    I don’t think it really is popular with the voters. It’s just occasionally they realize they have no choice.

    The UK conservative have recently launched their tax policies. They involve increasing taxes and cutting planned increases in spending. One of the commentators in the left-wing Guardian newspaper called this the policy of “It’s going to hurt you much more than it hurts us”. A description I think is quite fair. However, for all the left’s moaning the Conservatives will probably win the next election because, amongst other things, the electorate realise that increasing the deficit at the current rate can’t be sustained.

  19. Gravatar of Current Current
    11. October 2009 at 03:34

    The economic right never really win the argument. Rather the left lose it by their incompetent actions.

  20. Gravatar of ssumner ssumner
    11. October 2009 at 06:13

    Current You said;

    “Haven’t you read Joe Stiglitz’s book on this subject?

    I’m not disagreeing with you that the World Bank advise Neo-Liberal policies, they do and I agree with that. That doesn’t stop them being evil.”

    You most certainly did deny they promote neoliberal policies, as that is what our debate was all about. I said that the term “reform” meant “free market reforms” to the World Bank. You denied it. Whether they are evil or not is irrelevant to the discussion.

    You said:

    “More accurately they force market reforms on developing countries.

    Now, if you are really a supporter of democracy why do you support this? Why should the Swiss get democracy and the developing world get forced into things by unelected international bureaucrats?”

    They do not force reforms on countries. The countries are free to reject World Bank advice, and often do.

    I don’t support the World Bank at all. Indeed I’d like to see it abolished. Where did you get the idea that I supported the World Bank?

    Statsguy, I am pretty sure that the reforms used in this calculation are pretty uncontroversial market reforms. I have challanged people to get the data and prove me wrong. But I am confident that if someone did, and listed all the reforms considered, at 90% would be valid market reforms by the standards of almost any mainstream economist. They cited countries like Hong Kong as scoring very high—what does that tell you? Hong Kong also scores high on every other free market think tank’s index of economic freedom.

    I do agree with one point you made, it doesn’t address the issue of social spending, which I think countries will need to address. Elsewhere I wrote that the neoliberal revolution consisted mostly of privatization, removing price controls, and opening up market access. Social spending did not decline.

    BTW, if you agree with Current you agree with me, as Current now says the World bank has a neoliberal bias.

    Doc Merlin, It depends on your age. If you were young in 1989 it is not surprising that few people were going around bragging they were communists.

    And yes it is partly being in academia. Only academics are foolish enough to think that putting the picture of a brutal, bloodthirsty torturer like Che Guevara on their office wall is “cool.”

    Philo, Because voters are (collectively) much smarter than brilliant intellectuals like Paul Krugman. They correctly sense that running up $1.8 trillion dollar deficits doesn’t help the economy in the long run. Another good argument for democracy.

    Current, You said;

    “Do you mean “neoliberalism” in the normal sense of modernized classical liberalism. Or do you mean it in Scott’s odd sense that includes Switzerland and Denmark?”

    First of all the term is rarely used in the US. The only reporter I know who calls himself neoliberal is Mickey Kaus, who favors increased spending on social programs.

    In Europe I recall that The Economist and the FT are considered neoliberal publications, and they are hardly classical liberals. Indeed both are fond of countries like Switzerland and Denmark. And I recall that politicians like Tony Blair are often called neoliberals. You may not like the way I use the term, but there is a reason why we need the term “neoliberal,” they are not classical liberals.

  21. Gravatar of Current Current
    15. October 2009 at 07:58

    Current: “I’m not disagreeing with you that the World Bank advise Neo-Liberal policies, they do and I agree with that. That doesn’t stop them being evil.”
    Scott: “You most certainly did deny they promote neoliberal policies, as that is what our debate was all about. I said that the term ‘reform’ meant ‘free market reforms’ to the World Bank. You denied it. Whether they are evil or not is irrelevant to the discussion.”
    Scott: “if you agree with Current you agree with me, as Current now says the World bank has a neoliberal bias.”

    My point is that they mostly advise free-market policies. However, their practices, and indeed their existence isn’t coherent with their advice.

    My point is that giving out loans to developing countries aides corruption and rent-seeking. If they were really “idealistic” they wouldn’t do it at all.

    The original context of this was the “Doing Business” report which is produced by the World Bank. Now, given their motivations how do you think they draw up this report? Do they 1) Draw it up according to free-market principles. Or do they 2) Draw it up under mostly free-market principles, but deliberately avoid measuring detrimental things that they themselves encourage?

    Scott: “They do not force reforms on countries. The countries are free to reject World Bank advice, and often do.”

    Yes, but as I understand it that threatens future loans.

    Scott: “I don’t support the World Bank at all. Indeed I’d like to see it abolished. Where did you get the idea that I supported the World Bank?”

    Well, I think we mostly agree then.

    Scott: “First of all the term is rarely used in the US. The only reporter I know who calls himself neoliberal is Mickey Kaus, who favors increased spending on social programs.

    In Europe I recall that The Economist and the FT are considered neoliberal publications, and they are hardly classical liberals. Indeed both are fond of countries like Switzerland and Denmark. And I recall that politicians like Tony Blair are often called neoliberals. You may not like the way I use the term, but there is a reason why we need the term ‘neoliberal,’ they are not classical liberals.”

    Well, the only time I here the term “neoliberal” is when it’s used as a derogatory term for modern people who hold Classical Liberal opinions. I’ve never heard it used in an approving way. Certainly I’ve never heard anyone except you include things like social programs in it.

  22. Gravatar of ssumner ssumner
    17. October 2009 at 06:47

    Current, I oppose given foreign aid to corrupt governments in poor countries. But I can see how an idealistic person might disagree with me. They might think, “yes he’s bad, but we have to deal with him to help the poor, and if we attach enough strings at least some of the aid will get through.” I’m not saying they’re right (indeed I doubt it), but it’s certainly a view that an idealistic technocrat could hold.

    You are right that snubbing the WB might threaten future loans. But if the World Bank is so bad, then say “to hell with them,” and develop your country without the World Bank.

    You are right that the term ‘neoliberal’ is often viewed in a derogatory way. But that’s because most intellectuals are leftists. The terms capitalist, communist, fascist, libertarian, etc, all tend to be viewed in a derogatory way by intellectuals.

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