The last time the world saw an economic recession of this magnitude was during the Great Depression of the 1930s, which exposed the limit of neoclassical economics that was widely practised leading up to the Depression. The world then was quite similar to the present-day world leading up to this current pandemic-related economic recession.
According to International Monetary Fund’s (IMF or simply the ‘Fund’) October edition of Global Economic Outlook, global economic growth projections for 2020 stood at negative 4.4 percent – with income inequality rising, with the underlying faith in markets to self-clear without much government intervention, only meant enriching the ‘Robber Barons’ of the world.
Aftermath of a Catastrophe
The Great Depression led to the rise of the role of government in economic policy and regulation, both on the basis of Keynesian economics school of thought, and Franklin Delano Roosevelt’s (FDR) ‘New Deal’. Both of these found it important for government to provide leadership in terms of greater public investment, and laying the basis of private sector inclusion through funding and directly involving itself in entrepreneurship and in evolving a creative government.
The Silicon Valley phenomena and the rise of personal computing and smartphones are some of the examples of the government’s active and extensive involvement for enabling the private sector to commercialize innovative gains reached. At the same time, the ‘New Deal’ allowed the government to provide the needed infrastructure and employment opportunities through greater public investment in public works.
The Silicon Valley phenomena and the rise of personal computing and smartphones are some of the examples of the government’s active and extensive involvement for enabling the private sector to commercialize innovative gains reached
In Pakistan, the active role of government thro ugh five-years plans in the 1960s, and to a relatively lesser but still significant sense in the next two decades saw lower unemployment numbers and higher growth on average; with sustainability of debt and balance of payments accounts in general did not push the country to any major IMF programme till late 1980s.
Dawn of Corporate Reign
So what happened in the 1980s was the assault of politico-economic elites on the New Deal type policies of the greater role of government in the economy. Hence, the collusion backed by big corporations in the private sector, were finally able to reach needed political capital through successively deeper funding of the democratic process, especially in terms of election campaign financing. This in turn enabled them far greater leeway in public policy to safeguard their own interests, as more and more demos became disenfranchised.
As Noam Chomsky in his book ‘Profit over people: Neoliberalism and global order’ aptly puts it ‘The “principal architects” of the neoliberal “Washington consensus” are the masters of the private economy, mainly huge corporations that control much of the international economy and have the means to dominate policy formation as well as the structuring of thought and opinion.’
The foundations of the neoliberal assault were thus laid in greater depth into the mindset and workings of public policy discourse and process in the early 1980s under the governments of Ronald Reagan and Margaret Thatcher. Noam Chomsky identifies it as, ‘So it comes from the corporate sector, an ideology that is typified by a Ronald Reagan reading a script handed to him by his corporate masters, with his sunny smiles saying: government is the problem. Let’s get rid of government, which means lets hand over decisions to private tyrannies that are unaccountable to the public…’
That neoliberal mindset not just penetrated directly into public policies in individual countries at the back of ‘Chicago boys’ trained policymakers from mainstream economics schools rejoicing in the limited government, free-market philosophical underpinnings of mainly Milton Friedman, and Friedrich Hayek, but also dominated the thought process of Bretton Woods institutions. Here, for instance, the Structural Adjustment Programmes (SAPs) of the IMF led to growth neutral impacts on recipient countries, with many countries being worse off in terms of macroeconomic resilience than before the programme.
As a result of these neoliberal styled programmes, economic institutions were allowed to be designed in an extractive way, and government remaining on the outskirts of economic process reduced voter-confidence in democracy even as seen in lower voter turnout and political activism.
At the same time, many countries, including Pakistan, becoming frequent users of IMF programmes; falling in turn into the prolonged-user syndrome, where successive government rather than going for hard economic reforms, just relied on successive IMF bailout packages, as ‘elite capture’ took deeper roots in an overall environment of weak government regulation of the private sector.
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Hence, while the stock markets saw years of buoyancy, the real economy saw little improvement in its fundamentals for both employment, correct pricing in markets, and active privatization programmes in an overall weak public economic institutional environment. All these meant that the bubble of Neoliberalism, built on the greed of the politico-economic elites would only come crashing.
Accession of Crisis
The first major jolt to Neoliberalism was felt through the Global Financial Crisis of 2007/08. However, subsequent thinking in public policy discourse still saw reluctance to initiate a strong global challenge – by both major countries and also in Bretton Woods institutions – to the thought process behind ‘limited governments’.
Mazzucato and Skidelsky in the same article highlight this as ‘A new approach is long overdue. Since the era of British Prime Minister Margaret Thatcher and US President Ronald Reagan, the prevailing economic orthodoxy has effectively denied the state’s potential investment function and made balancing the budget an end in itself. This indifference to both the direction and level of economic activity rendered the 2008-09 crash all but inevitable, and the subsequent rush to austerity weakened the recovery. Now, the simultaneous collapse of supply and demand following the arrival of COVID-19 has made neoliberal orthodoxy doubly untenable.’
Now, the simultaneous collapse of supply and demand following the arrival of COVID-19 has made neoliberal orthodoxy doubly untenable
As rightly pointed out by Noam Chomsky that the current pandemic – which in itself is mainly an outcome of the missing institutions in the public sector of the likes, which led to the Salk Vaccine for Polio, and yet such a vaccine could not be reached even though the first major coronavirus attack took place in the early 2000s in the shape of SARs – is also a manifestation of limited governments under Neoliberalism and the short-sighted profit-minded approach of the pharmaceutical companies in the private sector.
Hence, time is long over-due for both individual governments, and the thought processes of multilateral institutions to move away from Neoliberalism. The urgency of this needed shift towards greater and more efficient role of government in the economy can be aptly highlighted through the following words of FDR ‘This nation asks for action, and action now.’
Role of Government
A more potent role of government would mean the foremost greater role of government and deeper regulation of markets, through better institutions or ministries/departments. As Joseph Stiglitz, among others, in a recent article ‘The starving state: why capitalism’s salvation depends on taxation’ rightly pointed out while advocating such an extensive role of government for reaching correct price signals, ‘Most economists rightly emphasize the role of the state in providing public goods and correcting market failures, but they often neglect the history of how markets came into being in the first place. The invisible hand of the market depended on the heavier hand of the state.’
Moreover, in terms of envisioning some of the important responsibilities of a non-neoliberal government, Danny M. Leipziger in his article ‘Economic growth strategies beyond Neoliberalism: do we need new models for the 21st century?’ pointed out ‘The primary prerequisite for success is being able to link longer-term strategic directions with medium-term economic management, and this may require the coordination of economic ministries under single senior leadership of a deputy prime minister or equivalent, the clear vision of where the country wants to be in 10 years’ time, reliance on technocrats rather than politicians to implement policies, and the monitoring of those policies on a systematic basis… What has changed, however, is the previously held belief in the advanced economies that unfiltered markets will yield optimal results and broad improvements in welfare. The US is a clear example showing how weakened regulation, asymmetric management of moral hazard behaviour versus bailouts in the financial sector, tax avoidance, and basic perversions of good government by lobbyists has robbed the capitalist mantra of some its gloss.’
While the current pandemic has introduced some very deep economic stress ripples into the global economy, it still remains small in magnitude as compared to the fast-approaching climate-change crisis. For this, a capable and extensive government role is needed all the more, given the heavy backlog of economic ills instilled by decades of ravages on the economic and political-economic fronts, caused by the perpetuation of extractive institutional design of the politico-economic elites; who in turn have mainly used Neoliberalism as a smokescreen to employ such designs.
The writer holds PhD in Economics degree from the University of Barcelona, and previously worked at International Monetary Fund. He tweets @omerjaved7
The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.