Easterly on neoliberalism
If you don’t like my lousy political posts, I have a new monetary one at Econlog.
In 2010, I wrote a paper entitled “The Unacknowledged Success of Neoliberalism.” This was in the midst of the Great Recession, when most people viewed neoliberalism as a dirty word. Even Chicago School economists like Richard Posner were jumping ship.
But I like to take the long view. Here’s the intro to my paper:
The neoliberal policy revolution that began in the late 1970s might be the most important recent event in world history. But it remains a curiously elusive and underreported phenomenon. Many on the left question the motives behind the reforms, as well as their efficacy, while some on the right talk as if the neoliberal revolution never happened.
Yet, the neoliberal revolution has been widespread and highly successful. And the motives of neoliberal reforms are much purer than one would imagine after reading left-wing criticisms of free-market reforms.
Tyler Cowen linked to a new paper by Bill Easterly, perhaps the world’s best development economist. Here’s his abstract:
The lack of growth response to “Washington Consensus” policy reforms in the 1980s and 1990s led to widespread doubts about the value of such reforms. This paper updates these stylized facts by analyzing moderate to extreme levels of inflation, black market premiums, currency overvaluation, negative real interest rates and abnormally low trade shares to GDP. It finds three new stylized facts: (1) policy outcomes worldwide have improved a lot since the 1990s, (2) improvements in policy outcomes and improvements in growth across countries are correlated with each other (3) growth has been good after reform in Africa and Latin America, in contrast to the “lost decades” of the 80s and 90s. This paper makes no claims about causality. However, if the old stylized facts on disappointing growth accompanying reforms led to doubts about economic reforms, new stylized facts should lead to some positive updating of such beliefs.
Sorry Bernie; nothing has changed over the past 40 years. It’s still true that Denmark, Switzerland and Singapore provide a roadmap for the moral, political and economic improvement of society.
PS. Alex Tabarrok directed me to a study showing that trade doesn’t just produce prosperity, it also produces peace:
We investigate the effect of trade integration on interstate military conflict. Our empirical analysis, based on a large panel data set of 243,225 country-pair observations from 1950 to 2000, confirms that an increase in bilateral trade interdependence significantly promotes peace. It also suggests that the peace-promotion effect of bilateral trade integration is significantly higher for contiguous countries that are likely to experience more conflict. More importantly, we find that not only bilateral trade but global trade openness also significantly promotes peace. It shows, however, that an increase in global trade openness reduces the probability of interstate conflict more for countries far apart from each other than it does for countries sharing borders. The main finding of the peace-promotion effect of bilateral and global trade integration holds robust when controlling for the simultaneous determination of trade and peace.
Some right wing nationalists are big fans of trade sanctions as a way of forcing countries to behave better. If I point out that Iran has behaved worse since Trump added trade sanctions they’ll say, “give it time.” If I point to Venezuelan sanctions they’ll say, “give it time”. If I point out that nearly 60 years of sanctions have failed to end communism in Cuba, they’ll say, “give it time.”
These people are very, very patient . . .
. . . except when it comes to China.
They insist that the US policy of engagement with China has failed, even though China is 10 times freer than in 1972 when the policy began. After all, China is still an authoritarian state. If I say “give it time”, they roll their eyes at my naiveté.
I guess “give it time” only applies to sanctions, not engagement.
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1. October 2019 at 09:02
Cuba has received a lot of support from OTHER countries. Besides, the purpose of sactions is also a moral one, not only achieve a result “tomorrow”. And Venezuela (as well as Iran) have a source of revenue that makes things more complicated.
1. October 2019 at 09:13
“Our empirical analysis, based on a large panel data set of 243,225 country-pair observations from 1950 to 2000, confirms that an increase in bilateral trade interdependence significantly promotes peace.”
Periods of strong trade in general promotes peace, but using specific examples here is futile. WWI and Ukraine’s, Syria’s, Libya’s, and Georgia’s conflicts both resulted in a time of high trading contacts.
“Some right wing nationalists are big fans of trade sanctions as a way of forcing countries to behave better.”
That would be you, not me.
I agree re: giving China time, not that the results will necessarily be good in all respects.
“growth has been good after reform in Africa and Latin America, in contrast to the “lost decades” of the 80s and 90s.”
Africa, yes, LatAm, no (outside mineral exporters).
1. October 2019 at 09:24
Great post. Unfortunately, neither of our major parties’ leaders have a clue what just happened.
1. October 2019 at 10:02
10 times freer doesn’t sound very scientific, can you prove this with actual numbers, or is this just your wild phantasy? The Chinese are much richer now, that’s true, but as far as all democratic freedoms are concerned, such as freedom of the press, freedom of expression, the right to vote, the rule of law, not so much has changed, on the contrary, in the last few years since 2012 things have become worse. The neoliberal theory unfortunately fails here.
You are also ignoring all the negative aspects of China’s rise. An important function of sanctions is the restriction of military power. Since the end of the sanctions, China’s political and military power has greatly increased. Unfortunately, the neo-liberal promises of a free China have not been fulfilled; only the Hongkongers and Taiwanese are still fighting back. But this is a fight of David against Goliath,
So now we have an extremely authoritarian Chinese regime with a lot more power, which is spreading its anti-democracy all over the world. See nothing, hear nothing, say nothing, that’s your three-monkey method. But you can’t get rid of reality with that.
I also think you look at the data with extreme bias. There are halfway serious lists of all sanctions of about the last 100 years. The results are mixed. We cannot make too many general statements here, if any at all.
Just as well, one could argue, that the hard stance towards the USSR caused its collapse. Maybe we should have just traded freely with the USSR? A marvelous idea?
Of course the actual objectives are important as well. For example, when it comes to limiting military power, sanctions can be very effective, which is only natural, because no state can expand militarily on a large scale if a world hegemon is effectively crippling its resources. Emphasis on: if. Smaller states like Cuba and Venezuela did not collapse so far but their military power is crippled.
Your Iran example is absurd. Iran’s new age military expansion began after Obama lifted the sanctions, which is again only natural, because suddenly Iran had large resources at its disposal that it did not have before. Here again, the neoliberal theory has failed, Iran has not become freer, they have simply bought a lot of conventional weapons, and are now waging as many military conflicts as possible. They could not do that under the sanctions. Israel and other nations warned Obama about that, but he wouldn’t listen. His ideology was more important to him. And now it’s Trump’s fault? That is not true, the really big mistakes regarding Iran were made by Carter, Obama, the Bushes (at least by W.), and I assume by Reagan, too.
1. October 2019 at 10:21
Jose, Are you saying the Cuban sanctions are a mistake? That the US China trade war is a mistake because other countries trade with China? What’s your point?
Christian, China is not freer than in 1972? Talk to a Chinese person about what life was like in 1972. You just showed me that you know nothing about Chinese history.
And it’s not just economic freedom. In almost all areas of life, including speech, China is dramatically freer than in 1972.
Hard to take anything you say seriously when you know so little about China. Might I suggest that you read a book about life under Mao?
And the recent surge in Iranian misbehavior is caused by Obama? LOL.
1. October 2019 at 10:44
Agree with everything here Scott, trade is the best anti-war policy.
I think people fail to recognize that trade is not zero-sum because they look through the lens of what is lost, not gained.
America’s manufacturing sector took a dive after China opened up, that is true, but Americans made trillions of dollars in investments in China, and this allowed what was remaining of our Manufacturing sector to rise in complexity and quality.
Indeed, America’s net wealth growth was the fastest of all the developed nations and faster than most developing nations, as we were the ones most open to trade.
Though, I am confused why more neoliberal reforms have been tough to come by these days. In the Western European economies, I am very skeptical that policy has improved since the 90s. My original guess was that trade shocks spur neoliberal reformations, at least in developed countries, but China’s rising competitiveness hasn’t spured the reforms I’m hoping for.
1. October 2019 at 11:36
My point is that no totalitarian government should receive the same treatment that liberal democracies receive, ever. I am very unease with the idea the we should “pursue our interests” when it entails commerce with totalitariam regimes. It sounds like all the regime’s couterparties are exploiting those countries’ populations. To be very clear, sanctions should include China, Venezuela, Iran AND Saudi Arabia.
1. October 2019 at 11:56
Also, the idea that sanctions “didn’t work” on Cuba seems misplaced, since the country has received help from numerous other countries, most notably Russia, Venezuela, Brazil. The Castros managed to deceive a long series of governments that don’t like the US, for personal gain.
1. October 2019 at 12:10
You’re confusing things on China Scott….
On tech, we have a Cold War, and as an actual technologist, I think Peter Thiel is right, we’re going to get much greater productivity growth from having two competing network tech stacks.
It’ll be this way until China ceases to build dystopian panopticon shit into the root of everything they make.
But YES, we should be moving towards free trade with China ON EVERYTHING ELSE, non-defense related.
Cuba’s a special case, bc of their proximity to the US, frankly we should just invade that county and return it to Cubans in the US. If we aren’t going to invade then, we LISTEN TO US CUBANS and choke them out.
Cuba is kind of like a reverse Israel in that regard. Israel is our 51st state a beachhead for property rights and Western culture in ME.
Last note Scott:
Texas ALONE provides the roadmap for the global future. Those other 3 are also rans.
1. October 2019 at 12:13
Scott just for the record:
On Hong Kong, you are happy to see China getting its ass kicked there right?
1. October 2019 at 12:31
Oh, I’ve read books about Mao.
I did not deny that China has become freer (quite the contrary), I questioned that they have become “10 times” freer. That’s a bold statement, especially regarding that there are still hardly any of the democratic freedoms I mentioned. Not to mention that the Orwellian surveillance state in its high-tech form is now for real. Not to mention Xi.
The recent development is not positive. And China is now extremely powerful, and no one knows how the world as a whole will develop if an authoritarian China is the hegemon of the world.
My impression is that you (and many other people) underestimate the positive influence of the US on the democratization of the world, probably because you are American.
We don’t have a comparison group either. How would a China with sanctions have developed? We just don’t know. But Mao would have died either way. Stalin did too.
With sanctions their political and military power would still be crippled. Now they are so powerful that one can only hope that everything will turn out for the better. If not, there is no easy way to stop them, if any way at all.
1. October 2019 at 13:41
Great post
1. October 2019 at 15:22
Scott, your paper entitled “The Unacknowledged Success of Neoliberalism.” was excellent. I have always been a believer in small government because much of what I see government doing is so unhelpful. Your paper reinforced my bias with some solid research. Thanks.
If you were to update this paper today would you likely note any significant changes in the last 10 years?
1. October 2019 at 16:11
“The Chinese are much richer now, that’s true, but as far as all democratic freedoms are concerned, such as freedom of the press, freedom of expression, the right to vote, the rule of law, not so much has changed, on the contrary, in the last few years since 2012 things have become worse.”
Freedom House rankings from 1 to 10:
………………2008….2012….2014….2016….2018
Human Freedom……6.0…..6.0….6.0……5.9…..5.9
Personal Freedom…5.7…..5.6….5.5……5.4…..5.4
Economic Freedom…6.3…..6.4….6.4……6.5…..6.5
1. October 2019 at 17:19
Christian List,
have you ever traveled anywhere? Immigrated anywhere? It might help with your general perspective on life and ability to see things in proper proportionality. The things you write here are so fantastically absurd, it seems to me you get all your information from the internet. This kind of indirect information is always biased, so it has to be tempered by personal experience. Personal experience is really useful to correctly calibrate other information we get indirectly.
Specifically – try to travel to China once. Get out of the hotel or tour bus. Open your eyes. Then, travel to some Middle Eastern country once. Go visit a mosque there too. Then, same thing with Africa. Not South Africa. Ideally, talk to people. Stay for a few weeks, not days. Or, work there. Locally, not as a trade rep from a hotel room talking to only a narrow range of people. Talk to people from all walks of life. Finally, talk to some of the refugees in Europe. Not when ordering your latte from them. In a personal conversation. Get some perspective, I beg you. You seem to completely misjudge the motivations of other people / governments.
1. October 2019 at 18:09
“With sanctions their political and military power would still be crippled.”
No, they wouldn’t be.
“Now they are so powerful that one can only hope that everything will turn out for the better. If not, there is no easy way to stop them, if any way at all.”
What is China going to do? Invade a nuclear Russia? They could roll into Vietnam but apparently don’t seem interested.
1. October 2019 at 18:21
I am banned from commenting on the libertarian Econlog site so I will comment here on Scott Sumner’s latest post.
“The same is true of exchanges of cash for zero interest T-bills. S&D models need to be used thoughtfully.”–Sumner
And indeed, today we have negative interest rates meaning that holding cash make sense in comparison to owning sovereigns.
This again raises the issue if a lone central bank can have much influence on the economy of a defined geographic region, that is can the Federal Reserve stimulate the economy of the United States?
In the next recession, we can probably guess that interest rates will go even lower, making holdings of cash even more attractive.
Long-term rates appear to be set globally, relatively immune to the efforts of any particular central bank. Well, that is what central bankers are saying.
Quantitative easing means buying assets in a world of $350 trillion dollars of assets.
Stanley Fischer appears to be migrating to a view that there needs to be fiscal monetary coordination, or money Financed fiscal programs. Though this view is outside that of orthodox macroeconomics and monetarism, I think it is the next step in central banking and fiscal policy.
2. October 2019 at 03:52
Christian, what is the evidence that China seeks “hegemony”? Xi’s recent speech quite clearly established that China does not seek hegemony (while US leaders openly advocate hegemony). China has gotten more peaceful as it became wealthier. China fought several wars while their military was weak (against South Korea, Vietnam, and India), but they have not fought any wars since 1979 when their economic reform began. The history of Asia from 1800-present clearly shows that war is more likely when China is weaker.
Also, let’s be clear on what you mean specifically when you say sanctions would be crippled China’s political and military power. China’s political and military power comes from one thing—its large economy. So sanctions could only have indirectly weakened Chinese political and military power by weakening its economy. However, China needs a large economy to provide decent living standards to its people. Without that large economy, the 1.4 billion Chinese people would join the sad refugees from stagnant parts of the third world begging for scraps from the US, and the US would treat them like it treats those refugees (or like it treated Chinese people in the 1800s). The US wouldn’t look like a positive influence for them then. So it’s no surprise the Chinese government is seen as the lesser evil.
2. October 2019 at 05:03
Scott, you need to stop shilling for your wife’s country. It’ll actually be better for their growth.
“Beijing Launches New Rule: Residents Must Pass Facial Recognition Test to Surf Internet”
I can’t imagine what it’s like in that head of yours. Be very glad that we’re going to technologically cold war China. Not only will it be good for productivity and Economic growth…
BUT ALSO, It will force our own govt. to consistently prove it’s not evil commie China. We need more Texas in our public morality, this helps that.
https://www.theepochtimes.com/beijing-launches-new-rule-residents-must-pass-facial-recognition-test-to-surf-internet_3099181.html
2. October 2019 at 05:39
Are you blocking some comments? Mine disappeared. It’s your call, but I never noticed that before. Maybe it is just a glitch somewhere.
2. October 2019 at 11:26
John, Growth slowed almost everywhere after the 1960s, but places that did neoliberal reforms outperformed areas that did not, in a relative sense.
Jose, You said:
“Also, the idea that sanctions “didn’t work” on Cuba seems misplaced, since the country has received help from numerous other countries, most notably Russia, Venezuela, Brazil. The Castros managed to deceive a long series of governments that don’t like the US, for personal gain.”
It’s wrong to say sanction didn’t work, because they didn’t work for a certain reason? Sorry I’m having trouble with your logic.
Morgan, You asked,
“On Hong Kong, you are happy to see China getting its ass kicked there right?”
Obviously I support the protestors. It was Trump that congratulated China on the 70th anniversary of the communist revolution. What a disgusting person. He frequently speaks in support of Xi’s get tough approach to things.
If you think I’m “shilling” for China then you are an idiot. I’m very critical of China’s human rights situation, much more than Trump.
Bob, I’d say I feel even more strongly about his point. Ten years ago the rot in Greece and Italy was less apparent. In a relative sense, the neoliberal places recovered more strongly from the Great Recession.
Todd, Yes, and that doesn’t even pick up the end of the one child policy, which had been the single biggest restriction on freedom.
Mark, Yes, I’m also confused by this hegemony thing. Is that like when a great power puts sanctions on any country that defies it by trading with Iran? China doesn’t do that. Is it like the Soviet Union in Eastern Europe until 1989? China doesn’t do that. Exactly what form will Chinese hegemony take?
Michael, Just a glitch, try it again. I did not delete your comment, never have deleted one of your comments.
Some are held up due to links, or if they are a new commenter. Not sure what happened. Sorry.
2. October 2019 at 12:05
“What a disgusting person.”
Was Obama a disgusting person? I mean, dude, he was president only four years ago. Come on, man. Use your brain. Any U.S. president would have done exactly the same thing.
https://2009-2017.state.gov/secretary/remarks/2016/09/262637.htm
2. October 2019 at 16:47
Scott, it’s not really a contradiction.
I support Hong Kong for freedom reasons AND I’m also happy to see China get its ss kicked.
BUT I’m happy that Trump is publicly complimenting China for 70 years, bc it’s smart to do…
He needs to give Xi some face to save, there’s just not much in trade discussion that we gain from shitting on China directly over Hong Kong. It’s part of getting deals done.
I don’t know why you don’t compartmentalize these things? maybe it’s bc you aren’t as smart as biz guys who it all time?
Anyway, I have explained to you how smart people think, take it for what you will.
2. October 2019 at 18:45
Mark,
1) Wherever they can already exercise hegemony today, they do it. Even Scott has unintentionally linked to corresponding reports in the past.
2) The Chinese regime has established a surveillance state in its maximal form aiming at the inside. More hegemony to the inside is not possible. It is absurd to assume that they would behave oppositional towards the outside as soon as they have the power. That’s just extremely naïve.
3) Even if the Chinese regime were not as authoritarian as they are (but they are), they would still seek hegemony as soon as they have the power. This just happens to everyone with so much power. Power corrupts. Of course there are always people who assume that “this time it’s different”. Well it’s not. What would be the argument for that? “Authoritarian communists don’t tick like that”??? Don’t make me cry.
If you know the history of the US, you know that it was both sides from the very beginning: idealistic “this time it’s different”-rhetoric paired with classical hegemony in reality. With China it won’t be any different, except maybe even more extreme, because of their authoritarian ideology and because they are so much bigger.
2. October 2019 at 19:50
Todd,
Thank you very much for this page, we finally have real numbers to compare.
Reading the actual reports helps. Not to mention that the current numbers are 7, 6, 6.5. So it did get worse, even in those rough scores. The worst is always 7, so China cannot hit more than rock bottom, I give you that.
There are also more detailed scores measured in 100 points max, this value declined as well. There are very, very few countries on this earth that are worse. Tibet is worse, with an aggregate score of 1 out 100. By whom is Tibet ruled again? I forgot.
China’s current aggregate score is 11 out of 100. Maybe that’s what Scott meant by “10 times freer”???? An “increase” from 1 to 10 is indeed “10 times freer”. This is just brilliant, Scott. Good job.
So let’s assume, for Scott’s benefit, that’s exactly what he meant: 1 to 10 is “10 times freer”. But then we still don’t know why this is the case. What part had sanctions to do with this? He doesn’t prove any relevant causality.
Scott apparently wants us to think that Mao would have been a freedom lover if there had been no sanctions against him??? One must not reverse cause and effect.
Stalin was at least followed by Khrushchev. And Xi is the new Brezhnev. You have to have Scott’s great sense of humor.
What kind of clothes did Xi currently wear on the parade? Really interesting, did anyone see that? A Stalin-Mao-Kim memorial uniform wouldn’t look any different.
How far is Scott going to push this idea? Free trade with Hitler Germany from 1933-1939, great idea or marvelous idea?
Compare the scores with the graph of the alleged “China hysteria”, which Scott interpreted so extremely manipulatively a few days ago. I bet the real numbers match China’s reputation amongst American voters relatively well. But why consider real events and hard facts when you can explain so much with “China hysteria” as Scott does. This is so scientific and impartial.
3. October 2019 at 16:14
Ungated version here
https://www.adb.org/sites/default/files/publication/28499/wp24-trade-integration-peace.pdf
I am not surprised trade encourages peace. There is quite a lot of historical evidence for it.
My concern is what regimes being undermined by commercialised modernisation might do. There is dramatic historical evidence that can go catastrophically wrong.