Neoliberalism Down Under

Don't throw the baby out with the bathwater.

That's one of the adages we need to keep in mind as we approach the current economic crisis - and one of those babies is the practice known in economic and political circles as neoliberalism.

The term is used often, but is also often misunderstood. It doesn't refer to liberal as an alternative to conservative. Rather, it focuses upon the importance and power of the free market - liberal meaning "free".

There are many different shades of neoliberalism that countries have experienced over the years. A good American example is NAFTA.

Neoliberalism has many names. In America it is associated with "Reaganomics" and in the UK with "Thatchernomics". In New Zealand it is known as "Rogernomics" while here in Australia it is known as "Economic Rationalism" with a notable subheading called "microeconomic reform".

Strangely enough, of all the nations that have benefited from neoliberalism, the one which seems to have benefited least is the United States. There are reasons for this - one being that American Neoliberalism has been closely associated with Supply Side economics while the UK, New Zealand and Australia have been mercifully free of this brand of populist "Voodoo" economics.

I would probably hazard a guess, though, that the US has not travelled down the neoliberal road as far as have other countries. In the UK, New Zealand and Australia, unions have been historically more powerful and social policies more left wing than anything experienced in the US. In fact, Britain, New Zealand and Australia were downright socialist in the 1970s compared to what America was then and is now.

And it was the socialism of the 1970s that was being abandoned in favour of neoliberalism. While America experimented with some aspects of liberalisation (airlines, for example), the trade protected, union dominated UK, New Zealand and Australia abandoned entire policies and practices wholesale in the name of economic progress.

At the time, such progress often produced more harm than good. The power of unions was broken either through direct conflict with the government (eg Thatcher verses the miners) or through negotiation with business owners (which was what happened in Australia and New Zealand). The form that neoliberalism took in each of these three English speaking countries depended upon the political climate of the time. Neoliberalism in the UK was harsh and combative, not least because the British Labour Party had committed itself to Democratic Socialism and promised a return to nationalising industries while the majority of Britons weren't interested. The result was that the Conservatives stay in power was long and deeply influential. By contrast, neoliberalism in Australia and New Zealand was implemented by Labour parties who were able to negotiate union compromises with business leaders - the idea being that their political success depended upon making neoliberalism a benefit to blue collar workers.

It was through the Australian and New Zealand experiences of neoliberalism being implemented by worker friendly political parties that helped give rise to "Third Way" economics. It was not until British Labor abandoned hard-line socialism and embraced "third way" politics that they were able to convince enough voters to deliver them government under Tony Blair (though that has hardly been a success).

As regular readers know, I am a fan of the Washington Consensus. Created as a "to do" list for developing economies needing help and support from the IMF, the Washington Consensus has since fallen out of favour. Partly this has to do with the harsh treatment of developing nations during the Asian Economic crisis (which was one of the main reasons why the IMF and the World Bank ended up being so hated by both sides of the political fence in 1997 and the 5-6 years or so following).

But the main reason why the Washington Consensus has fallen out of favour is that the United States doesn't even practice it. It is supremely ironic that Washington is one place where the Washington Consensus has been ignored. This is one of the major points of a recent article by Michael Hudson and Jeffrey Sommers:

Washington’s idealized picture of how free markets operate (as if such a thing ever existed) promised that countries outside the United States would get rich faster, approaching U.S.-style living standards if they let global investors buy their key industries and basic infrastructure. For half a century, this neoliberal model has been a hypocritical exercise in poor policy at best, and deception at worst, to convince other economies to impose self-destructive financial and tax policies, enabling U.S. investors to swoop in and buy their key assets at distress prices. (And for the U.S. economy to pay for these investment outflows in the form of more and more U.S. Treasury IOUs, yielding a low or even negative return when denominated in hard currencies.)

The neoliberal global system never was open in practice. America never imposed on itself the kind of shock therapy that President Clinton’s Treasury Secretary (and now Obama’s advisor) Robert Rubin promoted in Russia and the rest of the former Soviet bloc, from the Baltic countries in the northwest to Central Asia in the southeast. Just the opposite! Despite the fact that America’s own balance of trade and payments is soaring, consumer prices are rising and financial and property markets are plunging, there are no calls among its power elite to let the system self-correct. The Treasury is subsidizing America’s financial markets so as to save its financial class (minus some sacrificial lambs) and support its asset prices. Interest rates are being lowered to re-inflate asset prices, not raised to stabilize the dollar or slow domestic price inflation.

This is a fair criticism, but it simply points out that America never really embraced neoliberalism for itself. Getting other nations to drop trade barriers and liberalise their economies was fine... but not for America.

Yet it is very hard to read Hudson and Sommers' article without pointing to the Australian and New Zealand experiences of neoliberalism. While the economic changes we have experienced were far from perfect, many of them were much needed and have served these two nations well.

One of the most important phases of neoliberalism in Australia was banking deregulation during the 1980s. Though this was chaotic in places and led to some shady financial characters (Alan Bond and Christopher Skase to name just two) the eventual result was the creation of the "big four" Aussie banks - Commonwealth Bank, Westpac, National Australia Bank and the ANZ Bank. The "big four" do operate a sort of oligopoly of banking services in Australia yet they are tightly regulated by the Federal Government. While a banking crisis is not impossible in Australia, it is much more unlikely to happen than in the US. In fact, a few months ago I remember hearing a financial commentator speaking of US banking regulations being "archaic" in comparison to Australia's. Bottom line - Australia's tightly regulated banks are some of the best and safest banks in the world.

In terms of international trade, both Australia and New Zealand have some of the least restrictive practices in the world. Both Australia and New Zealand have significantly large agricultural sectors and historically these two nations have protected and subsidised this sector to protect farmers. This changed during the 1980s as well, with trade barriers and subsidies removed, forcing farmers to compete directly with overseas competitors. The initial result was less than encouraging - lots of family farms sold up and moved to the city because they couldn't compete. But as time went by, agribusiness developed strongly, with farmer-entrepreneurs buying up large tracts of land to use economies of scale while planting crops determined not by tradition or government edict but by market demand. This is light years beyond anything experienced in the heavily subsidised American and European agricultural sectors. The Cairns Group arose out of this period, and is one of the main international lobby groups arguing for free, unrestricted agricultural trade.

Fiscally, the governments of Australia and New Zealand have managed their finances well. Australia is unique in the industrialised world in having negative government debt levels - a situation brought about not by government oil revenues but through plain and simple accounting principles applied to government spending (ie spend less than you get in tax). This removal of government debt has meant that the government has no interest repayments on loans it took out to fund deficits, allowing tax revenue to be directed 100% towards government spending programs rather than debt servicing. It has also led to incremental tax cuts over the years. New Zealand's debt levels are small too. The United States and Europe, by contrast, already have unsustainable levels of debt and are about to experience massive loss of tax revenue, adding to their already sizeable debt levels.

Of course, I am Australian, and so I am biased in many ways towards my own country's economic achievements over the years. Moreover, I am realistic as well - market reform has not been all good and many people, especially the poor, are worse off as a result. Workplace Reform, undertaken by the Howard Government in its later years, was also deeply unpopular with ordinary people and eventually led to his electoral defeat in 2007.

Yet there is one thing which you can say about neoliberalism in Australia and New Zealand - it worked, and continues to work. The Washington Consensus, now so out of fashion, was the blueprint for Australia's and New Zealand's success. Fiscal prudence, deregulation, removal of subsidies and trade barriers, positive real interest rates, privatisation of government enterprises - all these things have been the basis of economic reform in these two nations.

And yet the neoliberalism experienced by these two nations never moved into supply-side stupidity or a strong pro market ideology. Both Australia and New Zealand continue to have universal health care and a generous pension system to help those who cannot help themselves. The neoliberalism experienced was thus more centrist than right wing.

For us here in Australia, the term "deregulation" means to free up a sector of the economy to allow market forces to dominate what is produced and at what price. In America, however, "deregulation" means a continual relaxation of laws to allow businesses to become more profitable while having less regulations holding them back, such as safety and environmental laws. The difference is obvious - Down under, deregulation was "market friendly" and takes into account various stakeholders while in the US, deregulation was "business friendly" and only helps one or more companies. There is a world of difference between the two - the former allowing the market to work effectively, the latter being a form of "you scratch my back I'll scratch yours" mentality.

The current economic crisis will inevitably drive America away from its ideological and fiscally irresponsible actions. That is good. But what will replace it? The populist solution - and one which is increasingly being touted by American economists and econ-bloggers - is to renege on the principles of free trade and to abandon neoliberal principles and such things as the Washington Consensus for... whatever Obama and congress will do presumably.

Of course, one of the more common complaints that free-market ideologues make these days is that "capitalism has never been tried", the implication being that the current crisis is actually due to government and regulation and that the solution is less/no government and less/no regulation. The same sort of complaint was made by Communist ideologues back in the 1970s and 1980s when the Soviet Union was decaying - if only Communism was "more pure", things would be better.

I am not either of these people. I am not a free-market ideologue. Yet I support many principles of neoliberalism and, to be honest, the USA has not implemented many of the important neoliberal principles. Had the US actually abided by the Washington Consensus, for example, it would not be in as much trouble as it is now. And the reason why I support many principles of neoliberalism is because I have seen them work in my own country and in neighbouring New Zealand. In many ways, how Australia and New Zealand survive this current crisis will, in turn, prove just how important neoliberalism and the Washington Consensus are in economic stability and growth.

Time will tell.