Globalization in Crisis

Is neoliberalism on the ropes?

BY JOHN MILLER | November/December 2022

This article is from Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org

This article is from the
November/December 2022 issue.

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When the global elites gathered in Davos, Switzerland in May 2022 for the World Economic Forum, the Financial Times, the leading British business daily, reported that “deglobalization,” not globalization, topped their agenda.

Even before the global power brokers met in Davos, the Financial Times’ editors had recognized “the changing nature of globalisation,” and worried that the economic pendulum, as they put it, “might swing too far in the opposite direction,” away from unfettered free trade. Following the Davos conference it fell to Martin Wolf, the Financial Times’ leading economics columnist, to buck up the powers-that-be. In his June 2022 Financial Times column, Wolf assured readers that while “the future of globalisation is in question,” it is “not dead” and “may not even be dying,” and he laid out the many ways the anti-globalizers had supposedly gotten things wrong.

However, unlike Wolf’s unnamed punching bags, the critics of globalization had neither declared globalization dead, nor claimed that countries can go without trade. The debate over globalization is not about economic isolation versus integration but rather about determining how countries should best engage with the global economy. The critics of globalization seek not to end globalization but to replace today’s leave-it-to-the-market globalization with a more managed, more equitable, and more sustainable globalization.

A Globalization Check-up

Globalization—that is to say international commerce—is not dead and may not be dying. But globalization is sure not what it was before the financial crisis of 2008–2009, the Covid-19 pandemic, and a worsening energy crisis and war in Europe. That much is unmistakable.

Trade is no longer growing more rapidly than global output. The sum of exports and imports, the usual measure of international trade, relative to global output, increased almost inexorably from 37.1% in 1980 to 60.7% in 2008. But with the global financial crisis and the Great Recession, international trade plummeted, falling even more quickly than output. As world economies recovered, trade never returned to its pre-crisis level, nor did global economic growth resume its previous pace. The decline was not uniform across countries and was more rapid for goods than services (except for during the pandemic). Still, there are a few signs that the growth of international trade will once again outpace the growth of the economy sometime soon. Other vital signs of globalization, such as foreign direct investment (FDI)—acquiring a substantial stake in a foreign business or buying it outright—tell much the same story. FDI inflows to other countries increased tenfold from 0.5% of global output in 1980 to 5.3% in 2007. With the financial crisis, that ratio fell to 2.3% in 2009. And then with the pandemic, FDI inflows into other countries fell off even further, dropping to 1.3%, closer to its level at the beginning of rapid globalization in 1980 than to its 2007 peak.

Those figures, however, might not constitute “an era of rapid deglobalisation,” as Wolf insists. After all, the ratio of international trade to global output was still 52.1% in 2020, a bit more than twice the 25.0% ratio back in 1970. But does that mean that “the neoliberal philosophy is tapped out,” as economics columnist Rana Foroohar wrote in her October 2022 New York Times guest essay? That’s our next question.

Greatly Exaggerated

Despite its current difficulties, Wolf was quick to remind readers of the seemingly unprecedented accomplishments of globalization in recent decades. Since the 1980s, a leave-it-to-the-market ideology has dominated economic domestic policy making—think of U.S. President Ronald Reagan and Prime Minister Margaret Thatcher in Britain—and promoted globalization based on the same neoliberal principles.

In his column Wolf says he makes “no apology” for the results of these neoliberal policies, as he recounted them in his column, quoting economist Douglas Irwin, the author of Free Trade Under Fire:

Between 1980 and 2019 virtually all countries became substantially better off, global inequality declined and the share of the world’s population in extreme poverty fell from 42 percent in 1981 to just 8.6 percent in 2018.

But the globalization record they tout failed to measure up to the record of globalization in the three decades before 1980, and what there was for successes since 1980 had little to do with the neoliberal policies that Wolf and Irwin endorse.

Not So fast

Let’s look first at the claim that “virtually all countries became substantially better off” from 1980 to 2018 (most recent year available). Output per person, (measured throughout as Gross Domestic Product (GDP) per capita corrected for inflation and differences in purchasing power), did rise in “virtually all countries” from 1980 to 2018. And that rising income held the potential to make those countries better off (depending on how it was distributed and how it was spent).

But that hardly makes this neoliberal era of globalization unprecedented or even distinctive. During the six-and-a-half decades of post-World War II globalization from 1950 to 2016, output per person increased in all but eight countries, as Oxford University economist and editor of the website Our World in Data, Max Roser, has documented.

On top of that, world output per person increased more slowly after 1980 than it had in the three previous decades: growing 2.0% annually from 1980 to 2018, well short of the 2.6% average from 1950 to 1980. (See Table 1.)

In addition, countries became better off at far different rates in different regions of the global economy during the years Wolf and Irwin celebrate. In Latin America and sub-Saharan Africa, output per person increased 1.27% and 1.47%, respectively, a year, well below the 2.0% global average from 1980 to 2018. In Asia, output per person increased far more quickly than the global average, 3.63% per year in East Asia, and 3.61% a year in South and Southeast Asia. Rapid growth in China and India pushed up output per person in Asia. Output per person increased at a 5.2% rate in China and a 4.1% rate in India, much faster than it had from 1950 to 1980 in both countries, and more than twice as fast in the case of India. And together China and India, the largest economy in Asia and third largest economy in Asia, account for more than half of all Asian output. (See Table 1.)

Not So Neoliberal

But the high levels of FDI, trade, or even rapid growth in China and India don’t demonstrate the efficacy of neoliberal policy. China, for instance, has notoriously tight controls on FDI, directing it to particular industries, and a host of other conditions not imposed on domestic investors. German economist Daniel Gross reports that the European Chamber of Commerce in China has complained loudly about China’s uneven playing field for foreign investors, and the U.S. government has complained bitterly about the Chinese government forcing foreign investors to reveal trade and technology secrets. Trade did increase more rapidly than output in both countries, as Wolf and Irwin would undoubtedly emphasize. Relative to Chinese GDP, trade increased from 12.4% in 1980 to 62.2% in 2007, and then after the financial crisis of 2008 and 2009 receded to 37.6% in 2018, three times its level in 1980. Relative to Indian GDP, trade tripled from its 15.4% 1980 level to 43.6% in 2018.

However, the correlation between trade and economic growth tells us little about the strategy these rapidly developing economies employed to engage the international economy. A trade-to-GDP ratio is a measure of a country’s degree of engagement with the world economy, but not of the degree of openness of the policies that determine the manner of engagement. India and China relied on export-led growth to fuel their rapid economic development, and their tariff levels have fallen precipitously, although they remained about twice the world average in 2017 (latest year available for the world average). But that doesn’t make them good poster children for free-market globalization. China still does not have a convertible currency (which can be easily exchanged for the currency of another country), maintains state control of its banking system, allows little foreign ownership in equity markets, and has inflexible labor markets, antithetical to neoliberal policy. Like much of Asia, both countries managed their trade policies and relied heavily on targeted government support for the development of high-value industries likely to become internationally competitive. Those policies left far less of the country’s economic fate to be determined by the market than neoliberalism would have prescribed. The success of those anti-neoliberal policies from 1965 to 1990, which were practiced in Japan, and then the four newly industrializing economies (Hong Kong, Singapore, South Korea, and Taiwan), and after that in Southeast Asia, were celebrated by the World Bank as “The East Asian Miracle” in 1993.

Still Not Neoliberal

Poverty Alleviation Without Neoliberalism

The record of poverty alleviation since 1980 is stunning and unprecedented. The number of people and share of the global population living in extreme poverty fell dramatically. By 2019, well over one billion fewer people were living on less than $2.15 a day, the threshold for extreme poverty, than in 1980. And the incidence of extreme poverty had dropped from 45.8% to 8.4%. From 1950 to 1980, extreme poverty rates only dropped from 51.2% to 45.8%, and more, not fewer, people were living in extreme poverty at the end of that period.

But this remarkable record of poverty reduction says very little about neoliberal trade policy. Over the last 50 years, the most dramatic reduction in poverty occurred in East Asia, first among countries such as South Korea and Taiwan, then in Southeast Asia (in countries such as Indonesia, Malaysia, and Thailand), and then in China and India—all countries that had extensive trade restrictions and relied on heavy government intervention in their economies.

Beyond that, almost all of the reductions in extreme poverty in the global economy from 1990 to 2019 occurred in China and India. In China, 908 million people had escaped extreme poverty and the rate of extreme poverty had fallen to less than 1%. In India, 276 million fewer people were living in extreme poverty, and the extreme poverty rate had fallen to 11.9%. Together, China and India, the two most populous countries in the world, accounted for 88% of the poverty alleviation of the period, which was accomplished by breaking—not following—the rules of neoliberalism.

Inequality Within Countries and Among Countries

The global Gini coefficient, the measure of inequality used by most economists, decreased from 0.71 in 1980 to 0.67 in 2020, indicating that the distance between the world’s distribution of income and global equality had been somewhat reduced. But the decline in global inequality only began after the Gini coefficient had matched its previous high of 0.72 in 2000. On top of that, the global economy remains breathtakingly unequal, more unequal than that in any country, including South Africa, the world’s most unequal economy.

All of the decline in global inequality in this period was due to a reduction in inequality among countries, which should not be attributed to neoliberal policy. Since 1980, the economies of the Global South, especially in Asia, and most especially China and then India, have closed a good bit of the gap between their output per person and that in the economies of the Global North, such as the United States. At the same time, much of those gains were offset by the widening differences between rich and poor within countries, which reached levels not seen since 1920.

The level of inequality among the nations of the global economy was cut in about half from 1980 to 2018. The ratio of the average income of the richest 10% of countries to the income of the bottom 50% of countries dropped from 19:1 to 10:1, still an alarmingly stark figure. Once again, it was the rapid growth of Asian economies that eschewed neoliberal policy prescriptions and drove that improvement. Chinese income per person grew about three-and-a-half times as quickly as U.S. income per person in that period. And income per person in India grew two-and-a-half times as quickly as the U.S. average from 1980 to 2018. Those gains were consequential. They moved the average income per person for more than one-third (36%) of the world’s population closer to that of the leading economy of the Global North and considerably closer to the world average. (See Table 2.)

At the same time, worsening inequality within countries undid much of what smaller income differences among countries had done to reduce global inequality. Income difference within countries ballooned. The income of the richest 10% inflated from nine times that of the bottom 50% in 1980 to an average of 15 times across the global economy in 2015. Inequality in China, India, and the United States worsened, and the differences between the rich and the rest widened. In China the ratio of the average income of the top 10% and that of the bottom 50% almost tripled from 1980 to 2015; in India the ratio increased to two-and-a-half fold in that period; and in the United States the ratio was half again as high as 1980 by 2015. (See Table 2.)

The contribution of neoliberal domestic and international policies to worsening inequality within countries was perhaps most evident in the United States. U.S. trade openness and inequality increased in lockstep from 1979 to 2007, as tracked by economist Pol Antras. At the same time, U.S. government policy became far more regressive, as pro-poor spending shrunk and tax cuts were lavished on the rich. On top of that, antiworker and antiunion labor policies—such as a failure to enforce existing labor laws and, in some states, the passage of new laws sharply circumscribing the right of workers to organize—proliferated. And as more people lost out, political opposition to neoliberal trade policies stiffened.

Neoliberalism or Democracy?

As globalization slows and even the powers-that-be have doubts about its effectiveness, the future of globalization is in question. One goal that most the critics of globalization share is to reshape globalization, not to end it, despite Wolf’s suggestions otherwise. That is, globalization’s critics want to push the economic pendulum toward a fairer, more democratic, and environmentally sustainable globalization, just where the Financial Times editors feared it might go. The question Dollars & Sense’s Arthur MacEwan (a.k.a. Dr. Dollar) posed in the title of his 1999 book remains the crucial one: Do we choose neoliberalism or democracy?

JOHN MILLER is a professor of economics at Wheaton College and a member of the Dollars & Sense collective.

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