Tag Archives: Globalisation

SANCTIONS are increasingly popular, but do they actually work? – Madeline Grant * BLOCKING PROGRESS. The damaging side effects of economic sanctions – Dr. Nima Sanandaji.

“If goods don’t cross borders, soldiers will.”

Have we really given sufficient thought to whether such measures actually work?

Reliance on sanctions is a mistake. Sanctions generally do not achieve their underlying objectives, Not only do sanctions undermine the well-being of those living in targeted countries, they also create substantial costs for the world economy. In addition, sanctions reduce economic and civil liberties, and by disrupting global value chains undermine peaceful relations, leaving everyone worse off.

If the Iraqis had been able to trade with the world, it is doubtful if groups such as ISIS would have found a breeding ground in the country. The US, which has been the main diplomatic force pushing for sanctions, only bears a small share of the cost, just 0.6 per cent of the Western trade loss.

Shutting out countries from the global marketplace is not conducive to free markets or free societies. Linking the world together in advanced global value chains is the best strategy for future peace and prosperity.

Around the world, growing numbers of governments are using economic sanctions as a tool to influence the behaviour of other countries. Their tactics are nothing new. Sanctions and embargoes have a long and chequered past, dating back to antiquity, when the Athenian statesman Pericles issued the so-called “Megarian decree” in response to the abduction of three local women in 432 BC. Yet, as Gary Hufbauer and Jeffrey Schott note in their study of the topic, rather than preventing conflict, Pericles’s sanctions in Ancient Greece brought a number of unintended consequences; ultimately helping to prolong and intensify the Peloponnesian War.

This might be the first instance of sanctions being tried, and failing, but we have many more recent cases to choose from. Veterans of GCSE history may remember the League of Nations and the failure of its sanctions to protect Abyssinia from Fascist Italy. Draconian regimes still rule countries like Iran, largely under American embargo since 1979 – not to mention Cuba, whose sanctions date back to 1962.

Fast forward to 2018, and the global appetite for sanctions looks as strong as ever, with President Trump edging ever closer to full-scale trade war with China. Rarely a week seems to go by without news of fresh sanctions against Russia from the Western world. Citizens, horrified by extra-judicial killings and cyber warfare, might well favour such penalties. In times of public outrage, it may feel and look good for policy-makers to be “doing something”. But have we given sufficient thought to whether such measures actually work?

Trade sanctions do occasionally achieve their strategic or foreign policy goals. Yet far more often, they are ineffective blunt instruments.

Policy-makers should aim to promote free trade on a global level, to secure peace and prosperity.

Those that fail to learn from history, are doomed to repeat it, in Churchill’s famous words. Unfortunately, the long and largely fruitless history of sanctions suggests we’ve learnt very little.

CapX

BLOCKING PROGRESS. The damaging side effects of economic sanctions

Dr. Nima Sanandaji.

Dr. Nima Sanandaji is a Kurdish Swedish author of 25 books and the president of the European Centre of Entrepreneurship and Policy Reform.

Executive summary

During the twentieth century, economic sanctions became more prevalent. In the twenty-first century they have become a frequently used tool for governments seeking to change the behaviour of other countries.

An extensive research literature exists on the effectiveness of sanctions. Overall the research shows that sanctions very rarely achieve foreign policy goals. At the same time, sanctions create negative externalities.

Sanctions limit the economic well-being of people in targeted countries, in some cases leading to malnourishment or even starvation. They also undermine economic and civil liberties, instead encouraging centralised state control.

While sanctions are often aimed at destabilising governments, people in sanctioned countries often turn to their government when the country is isolated from the global marketplace. The sanctions on Russia in early 2014 coincided with Vladimir Putin’s popularity rising from an all-time low to an all-time high point.

The sanctions against Russia have led to a trade loss estimated at US$114 billion, with US$44 billion borne by the sanctioning Western countries. In percentage terms, Germany bears almost 40 per cent of the Western trade loss, compared with just 0.6 per cent incurred by the United States.

Two wealthy countries that are neutral in sanctions against Russia Israel and Switzerland have experienced a trade loss of 25 per cent between 2014 and 2016. This is nearly as high as the 30 per cent trade loss of the largest four sanctioning economies. Since sanctions undermine global value chains, neutral third-party countries are also hurt.

Fostering global value chains is a better strategy for promoting security, since economic interdependency makes peace a more attractive alternative than conflict. Market exchange is typically a better option than sanctions if the objective is a free, peaceful and prosperous world.

Introduction

Economic sanctions have become an increasingly popular tool in foreign affairs since the end of the Cold War. The concept of economic sanctions is not new. In fact, 2,400 years ago Athens declared a trade embargo on the neighbouring city state of Megara, strangling the city’s trade. Powers with naval dominance, such as the British Empire, used trade blockades during times of war. However, while sanctions were a known policy tool, they were seldom systematically used until modern times. During the twentieth century sanctions become more prevalent, and in the twenty-first century their position as a popular foreign policy tool has solidified.

This paper argues that this reliance on sanctions is a mistake. Sanctions generally do not achieve the underlying objectives, while they create substantial costs for the world economy. In addition, sanctions reduce economic and civil liberties, and by disrupting global value chains undermine peaceful relations.

Economic sanctions usually aim at either signalling dissatisfaction with particular policies, constraining the sanctioned nation or its leaders from further action, or to act as a coercive measure towards a government in an attempt to reverse its actions. Sanctions can severely undermine prosperity in countries when the ‘international community’ joins together in isolating them. In 1966, the United Nations for the first time introduced comprehensive sanctions against Rhodesia. Eleven years later similar measures were enforced against South Africa. These policies were directed at undermining white supremacy rule, an aim which seems to have been accomplished. These sanctions policies were successful due to the context in which they were introduced. Rhodesia and South Africa were countries governed by apartheid rule, and the large majority of the population were discriminated against due to the colour of their skin. Many whites also strongly objected to apartheid. A similarity can be drawn to Ronald Reagan’s escalation of the Cold War, which arguably accelerated the fall of the Soviet Union. In both cases, pressure was put on systems already on the brink of collapse.

During the Cold War period, sanctions were still relatively uncommon. If the West isolated a nation economically, it ran the risk of turning that nation over to the Soviet bloc. Rhodesia and South Africa were obviously the exception, since they were rejected by both blocs due to their racist policies. When the Cold War ended, Western powers gained both military and economic dominance and hence could apply sanctions policies more frequently without as many geopolitical risks. However, contrary to the early experience with apartheid states, sanctions overall proved to be less than effective.

Sanctions rarely achieve their goals

Extensive research has been carried out on the outcome and impact of economic sanctions, with different claims over their results. The Oxford Reference overview article on economic sanctions states that ‘There is considerable disagreement over their effectiveness. Critics point out that they are easily evaded and often inflict more pain on those they are designed to help than on the governments they are meant to influence”. The first major wave of research on the effects of economic sanctions was published during the 1960s and 1970s. The consensus of these papers, as summarised by Baldwin (1985: 373), was that sanctions were not as effective as military force.

The debate is not one-sided, as for some time there was academic enthusiasm about sanctions. According to Rogers (1996: 72), ‘Economic sanctions are more effective than most analysts suggest. Their efficacy is underrated in part because unlike other foreign policy instruments sanctions have no natural advocate or constituency’. An influential study by Hufbauer, Schott and Elliot (1990) was for some time seen as proof that sanctions were an effective tool to achieve policy change in foreign countries. The researchers examined 115 identified cases of sanctions between 1914 and 1990, and concluded that sanctions achieved their foreign policy goals in 40 of them.

In a widely cited study, Pape (1997) examined these 40 cases and concluded that only five of them involved a success for sanctions policy. Thus, four per cent rather than 35 per cent of the cases examined were a success for sanctions policy. Of the remainder, eighteen were determined by force (military defeats, governments being overthrown, etc.) rather than sanctions, eight were failures in which the target state did not concede to the coercer’s demands, six were trade disputes, and three remained undetermined.

For example, the sanctions against Germany during World War I and against Germany and Japan during World War II had been counted as having achieved their goals in the Hufbauer et al. study. However, Pape argues that both cases were won by military force. During World War I, for example, the food shortage linked to the British blockade led to the starvation of around 500,000 Germans. But the country continued to fight until militarily defeated. Another example is Rafael Trujillo, the president of the Dominican Republic, who was a protégé of the United States. His regime was seen as an embarrassment due to its repressive actions, and the US acted to remove him from power. As part of this policy, tariffs were imposed on Dominican sugar, while oil, trucks and military spare parts were embargoed. Pape challenges the conclusion of Hufbauer et al. that this was a successful case for sanctions, since the issue was resolved when the president was assassinated and his family driven out of the country. Pape concedes that sanctions in themselves have occasionally achieved foreign policy goals, such as when India imposed sanctions on Nepal in 1989 and when the US imposed sanctions against Poland in 1981. However, these are rare cases.

Although rare, the successes of sanctions policies are worth exploring. In 1989, India imposed a trade blockade on Nepal over a dispute about transit treaties and uneasiness over Nepal’s increased closeness with China. Since Nepal is a landlocked nation, it imports all of its petroleum supplies from India. The urgent fuel crisis brought on by the sanctions forced Nepal to introduce the policy changes desired by India. In 2015 Nepal accused India of having imposed a new undeclared blockade, which cut off fuel supplies and thus caused an economic and humanitarian crisis. The blockade forced Nepal to introduce constitutional amendments relating to the minority community of Indian origin in the country. Thus, it seems that India has achieved its aims through sanctions more than once. This is not surprising since the conditions and aims of the sanctions were similar in both cases.

Another case is the sanctions that the US and other Western countries imposed on Poland in 1981, in order to push for political change. Specifically, the sanctions were imposed after the martial-law crackdown of the Polish state on the Solidarity trade union. The sanctions had a major effect on Poland’s economy and seem to have influenced politics. The Solidarity movement was ultimately successful in helping to transform Poland from Marxism to democracy and a market economy.

There are also some new studies in favour of sanctions, though the consensus is still against them. Marinov (2005: 564) concludes that: ‘There is much pessimism on whether [sanctions] ever work. This article shows that economic pressure works in at least one respect: it destabilizes the leaders it targets’. In an empirical analysis, Dashti-Gibson, Davis and Radcliff (1997) reach a similar conclusion. According to this study, sanctions are able to destabilise countries, and financial sanctions in particular may achieve other goals. However, even with this form of more successful sanctions policy, the authors find a modest downward trend over time in the relative effectiveness. Drezner (2003) notes that most scholars consider sanctions an ineffective tool of statecraft. By taking into account unrealised threats of sanctions, Drezner shows that the bulk of successful economic coercion episodes are those in which the threat of sanctions leads to a policy change.

Sanctions limit economic and social liberty, instead encouraging state control

On the other hand, one must also consider that sanctions not only limit the economic well-being of people in the targeted country (in some cases leading to malnourishment or even starvation), but may also reduce economic and civil liberties. By doing so, they undermine the free exchange which breeds global prosperity and peaceful relations.

Peksen and Drury (2010) used a time-series cross-national dataset of sanctions over the period 1972 to 2000 to study the effectiveness of sanctions in reaching their goals. The authors concluded that ‘both the immediate and longer-term effects of economic sanctions significantly reduce the level of democratic freedoms in the target’ (ibid: 240). This occurs through reduced political rights as well as reduced civil liberties in the sanctioned state.

One illustrative example is the sanctions policy imposed on North Korea. World powers have relied on economic and financial sanctions to isolate the North Korean regime and force it into denuclearisation discussions. However, as the Council on Foreign Relations explains, it is doubtful if sanctions have reached their goals and if they ever will (Albert 2018). In fact, these policies have pushed North Korea to stick to a centrally planned command economy. Fortunately, there have been some openings for North Korea to trade with China and to a limited degree also South Korea. Gradually the North Korean state has incorporated some elements of free markets into its economic model, a change which has brought about a quiet social revolution (Kranz 2017). North Korea is still an authoritarian and brutal state, but the shift towards a market economy is nonetheless positive, it has for example reduced starvation.

Recently, North and South Korea signed the Panmunjom Declaration for Peace, Prosperity and Unification of the Korean Peninsula. This historic document represents a move towards peace in one of the longest global conflicts; a conflict which could result in nuclear war. An important part of the deal between the two Korean states is about fostering trade links. A question worth asking is: what if North Korea had not been exposed to international sanctions? It is likely that the state would have pushed for market integration at an earlier stage and also to a greater extent. It is also likely that the leadership of the country would have been less rather than more hostile towards the rest of the world.

Sometimes sanctions achieve certain goals, for example undermining the finances of a regime, while also creating massive unintended effects. A famous example is the economic sanctions directed against Saddam Hussein’s Baathist regime in Iraq. A near-total trade and financial embargo was imposed by the UN Security Council four days after Iraq’s invasion of neighbouring Kuwait. There is a general consensus that the sanctions achieved their goal of limiting the military development of Iraq, but also that the sanctions created poverty and malnutrition among the civilian population. According to UNICEF, per capita income in Iraq dropped from $3510 in 1989 to $450 in 1996 (Sen 2003). People’s living standards collapsed.

Free exchange fosters peace

Some 4,000 years ago, the first tamkarum entrepreneurs of the world emerged in Iraq and neighbouring Syria. During the early middle ages, the free-market renaissance of the Islamic Golden Age was focused on Baghdad. In part, this tradition of enterprise lived on even during modern times.

Before the UN sanctions were introduced, Iraq still had elements of a developed economy and a well-educated middle class. The country could have built upon this, and its entrepreneurial culture, to become more prosperous. Instead, due to global isolation the country’s economy collapsed. Educated people left Iraq as job opportunities became scarce. So, the sanctions did not topple Saddam Hussein, but did significantly limit the ability of people to benefit from market forces.

Iran also has a millennia long story of enterprise. The first known account of specialisation in a marketplace was given by Xenophon two thousand years before Adam Smith, and was based on the accounts of the marketplace of ancient Persia. In the sixteenth century, a Portuguese account describes the impressive amount of sophisticated agricultural and industrial goods for sale at the port of Hormuz, described as a free marketplace. Iran, Iraq and Syria all have deep traditions of enterprise and global exchange that could be tapped, but for this to happen trade routes must be open.

The importance of market commerce for long-term stability is often neglected. Yet, trade and commerce are often the alternative to conflict. Sanctions can break the link of the targeted nation to the global marketplace. Goods that used to be imported are suddenly in short supply, and those who work in exporting firms might lose their jobs. The government therefore intervenes to ensure that the immediate crisis is addressed. The country turns away from market freedom towards state intervention, and the people begin to view the rest of the world with suspicion. In the case of Iraq, the people ultimately turned not only to state reliance but also to tribal society and feuding militias. Sanctions thus induced future instability.

If the Iraqis had been able to trade with the world, it is doubtful if groups such as ISIS would have found a breeding ground in the country.

Putin’s popularity increased when Russia was sanctioned

One aim of sanctions is to destabilise governments, inspired by the regime changes in Rhodesia and South Africa. However, these were unusual cases, in which the vast majority of the populations suffered from white supremacy rule and naturally viewed the state with suspicion. In countries where the bond between the ruling classes and the population is stronger, sanctions can have the opposite effect by expanding the rulers’ grip over society.

A topical case is the sanctions introduced against Russia in early 2014, which have since expanded, at least from the US. These sanctions were implemented after Russia intervened in Ukraine. One concern raised in a report from the Centre for European Policy Studies is that the sanctions actually facilitate what they are designed to combat, they make Putin more popular, not less (Dolidze 2015). The mechanism through which this happens is that average Russians deem the sanctions imposed by the rest of the world to be unfair, siding with their own government position. The report states: ‘it seems that the “unfair” western sanctions have had the perverse effect of increasing Putin’s popularity at the start of the Ukraine crisis in November 2013 to the present, his ratings have risen from an ever-low to an ever-high point’.

In the last Presidential elections, held in March this year, Putin won re-election for his second consecutive term in office with 77 per cent of the vote. Although these numbers are not reliable, and some opposition candidates were blocked, it still seems that Putin currently holds strong approval ratings. The support comes as no surprise. One should remember that people above all else are motivated by seIf-interest for themselves and their families. If the US imposes sanctions which significantly increase the cost of putting food on the table for your family, you are not likely to hold a positive view of US policies.

The US recently began to target businesspersons as a way of broadening the scope of sanctions. Earlier this year, the US Treasury published a list of 96 businessmen of Russian origin. The unusual element to this was that this list was not focused on political or criminal activity; it was compiled according to wealth, based on the yearly wealth index published by Forbes. The list even includes businesspersons living in exile and in fear of persecution after falling out with the Russian state.

In theory, the sanctions against Russia are targeted on a few sectors and towards the firms owned by the political elite of the country. The reality is, however, far from the intended design of the sanctions. The inherent complexity of a world economy made up of global value chains has resulted in significant unintended consequences, which not only hurt the Russian population, but also European economies, and even those Western economies which have not participated in the sanctions policies.

Trade losses from sanctions against Russia

Crozet and Hinz (2017) analyse the friendly-me effect of the Russian sanctions and the counter-sanctions imposed by Russia. The authors study monthly trade data from 78 countries, as well as firm-level data, to estimate the actual impact of the sanctions. The authors find that the sanctions have led to a total trade loss of US$114 billion, with US$44 biliion borne by sanctioning Western countries. Out of the loss borne by the sanctioning countries, 90 per cent is incurred by EU member states. Germany is particularly badly affected, while the US, which has been the main diplomatic force pushing for the sanctions, only bears a small share of the cost. In percentage terms, Germany bears almost 40 per cent of the Western trade loss, compared with just 0.6 per cent incurred by the US.

In a recent study, Dennis Avorin and I look more closely at the friendly fire effect of sanctions policy. We focus on the two Western economies that did not participate in the policy to impose sanctions on Russia (Sanandaji and Avorin 2018). One might imagine that the two countries, Switzerland and Israel, would have massively increased their trade with Russia since the sanctions hinder Russia from trading with other Western economies. The trade data between 2014 and 2016 suggest that the opposite is true. Exports to Russia fell by around 25 per cent in the two non-sanctioning economies. This is nearly as high as the 30 per cent drop in exports experienced on average by the four largest economies engaged in the sanctions (US, Japan, Germany and UK). Between February 2014 and December 2016, we estimate that Israel had a trade loss with Russia amounting to US$680 million, while the loss for Switzerland was US$2.38 billion.

Of course, correlation and causation are two different things. It is dichult to separate the effect of reduced trade brought on by sanctions and the effect brought on by the fall in the Ruble (which in turn does reflect sanctions, but also other important economic drivers such as lower oil prices). Yet, the observation that the loss in trade was almost of the same magnitude in sanctioning and non-sanctioning economies is still important, not least because one might have expected Russia to turn to trading with Switzerland and Israel as an alternative to the other Western countries. Third parties are obviously hurt by unintended consequences.

This provides an important lesson. When the global value chains that connect people and businesses together in the modern world economy are disrupted, massive unintended losses are created. Countries that in theory are neutral are also significantly affected. As a tool for foreign policy, sanctions may have their use. But their cost in practice is much higher than was originally intended.

As the nineteenth-century economist Otto T. Mailery wrote: ‘If goods don’t cross borders, soldiers will’. This is, of course, even more relevant in the modern global economy in which global value chains create substantial interdependency between nations. Sanctions policies which exclude countries from trade with Western economies through unintended consequences reduce peaceful interdependence and thus undermine long-term global security.

A greater understanding of the history of capitalism as an institution might be useful in this regard. A commonly held view today is that the market economy is a recent invention of the Western world. In fact, for much of the last four millennia, the Middle East has alongside China and India been a free-market centre of the world, with advanced manufacturing, financial institutions and global trade. The periods characterised by market exchange have also been quite peaceful. Peaceful market exchange between the East and the West continued until the beginning of the eighteenth century, when the British Empire introduced sanctions against the industrial goods of Persia, India and China.

The motive was to foster Britain’s own industrial development. Instead of peaceful market exchange, a more aggressive form of colonial capitalism was to dominate. When later the same countries turned towards state planning, this was in large part motivated by the fact that the market economy had become associated with foreign colonialism. These embargoes, associated with the British industrial revolution, moved economic policies in the great eastern civilisations away from the market economy and thus had a significant effect on world politics. Shutting out countries from the global marketplace is not conducive to free markets or free societies.

Russia, likewise, is today associated in the West with state planning and the Soviet period. Yet, the country has a long history of peaceful trade. The Novgorod Republic, a predecessor to modern Russia, was a merchant republic. Until the communist revolution, Russia had deep trade relations with Europe and even the US. After the fall of communism, the country could have moved towards a market-friendly model. Relatively recently, there was interest in implementing market reforms inspired by Chicago School economists. The personal income tax rate in Russia is a flat 13 per cent, while the top corporate tax rate is 20 per cent. In these regards, at least, the country is quite market-oriented. However, corruption and bad governance hindered moves towards a market economy and an oligarch-dominated economy developed instead. We cannot however disregard the effect of sanctions. When sanctions are imposed on a country, it is likely to turn away from economic freedom and towards central planning. In fact, even the threat of future sanctions will favour central planning. The simple reason is that an economy is in great trouble if it is reliant on foreign goods and sanctions are introduced. Better then to rely on state enterprises or enterprises run by oligarchs with close links to the state leadership.

There is still hope for countries such as Russia. The Index of Economic Freedom finds that Russia is a relatively free-market country when it comes to business freedom, trade freedom, tax burden and fiscal health. The weaknesses of the system are, amongst others, lack of protection for private property and low freedom for investors. The government of Russia would have stronger incentives to improve these weaknesses if the country were more integrated into global trade and investment networks.

A last point about sanctions is that they became popular when the Soviet bloc fell. The western world gained economic dominance and the US in particular started using this dominance to pursue foreign policy goals. Today, however, China, India and other countries are rising as prosperous world economies. If the West pushes countries away through sanctions, they will become more dependent on trade with China and India instead. The West ultimately isolates itself, not only the sanctioned economies.

The point is not that sanctions are always the wrong policy, but that they should be used with regard for their considerable friendly-fire effects. In addition, a key aim of foreign policy should be to include more and more countries in free global trade.

Linking the world together in advanced global value chains is the best strategy for future peace and prosperity.

ADVERTISING SHITS IN YOUR HEAD. Reconnecting to Meaningful Values * JUNK VALUES. Consumerism literally is depressing – Johann Hari.

Advertising is the PR team for an economic system, Neoliberal Globalisation, that operates by making us feel inadequate and telling us the solution is to constantly spend.

We are constantly bombarded with messages that we will feel better only if we buy some specific product; and then buy something more; and buy again, and on and on, until finally your family buys your coffin.

Can we turn off the autopilot, and take back control for ourselves?

Spending often isn’t about the object itself. It is about getting to a psychological state that makes you feel better.

When there is pollution in the air that makes us feel worse, we ban the source of the pollution.

Advertising is a form of mental pollution.

When I was trying to apply everything I had learned to change, in order to be less depressed, I felt a dull, insistent tug on me. I kept getting signals that the way to be happy is simple. Buy stuff. Show it off. Display your status. Acquire things. These impulses called to me, from every advertisement, and from so many social interactions. I had learned from Tim Kasser that these are junk values, a trap that leads only to greater anxiety and depression. But what is the way beyond them? I could understand the arguments against them very well. I was persuaded. But there they were, in my head, and all around me, trying to pull me back down.

But Tim, I learned, has been proposing two ways, as starters, to wriggle free. The first is defensive. And the second is proactive, a way to stir our different values.

When there is pollution in the air that makes us feel worse, we ban the source of the pollution: we don’t allow factories to pump lead into our air. Advertising, he says, is a form of mental pollution. So there’s an obvious solution. Restrict or ban mental pollution, just like we restrict or ban physical pollution.

This isn’t an abstract idea. It has already been tried in many places. For example, the city of Sao Paulo, in Brazil, was being slowly smothered by billboards. They covered every possible space, gaudy logos and brands dominated the skyline wherever you looked. It had made the city look ugly, and made people feel ugly, by telling them everywhere they looked that they had to consume.

So in 2007 the city’s government took a bold step, they banned all outdoor advertising: everything. They called it the Clean City Law. As the signs were removed one by one, people began to see beautiful old buildings that had long been hidden. The constant ego-irritation of being told to spend was taken away, and was replaced with works of public art. Some 70 percent of the city’s residents say the change has made it a better place. I went there to see it, and almost everyone says the city seems somehow psychologically cleaner and clearer than it did before.

We could take this insight and go further. Several countries, including Sweden and Greece, have banned advertising directed at children. While I was writing this book, there was a controversy after a company marketing diet products put advertisements in the London Underground asking, ARE YOU BEACH BODY READY? next to a picture of an impossibly lithe woman. The implication was that if you are one of the 99.99 percent of humans who look less buff than this, you are not “ready” to show your flesh on the beach. There was a big backlash, and the posters were eventually banned. It prompted a wave of protests across London, where people defaced ads with the words “Advertising shits in your head.”

It made me think: Imagine if we had a tough advertising regulator who wouldn’t permit ads designed to make us feel bad in any way. How many ads would survive? That’s an achievable goal, and it would clear a lot of mental pollution from our minds.

This has some value in itself, but I think the fight for it could spur a deeper conversation. Advertising is only the PR team for an economic system that operates by making us feel inadequate and telling us the solution is to constantly spend. My hunch is that, if we start to really talk about how this affects our emotional health, we will begin to see the need for more radical changes.

There was a hint of how this might start in an experiment that tried to go deeper, not just to block bad messages that divert our desires onto junk, but to see if we can draw out our positive values. This led to the second, and most exciting, path back that Tim has explored.

The kids were telling Nathan Dungan one thing, over and over again. They needed stuff. They needed consumer objects. And they were frustrated, outright angry, that they weren’t getting them. Their parents were refusing to buy the sneakers or designer clothes or latest gadgets that they needed to have, and it was throwing them into an existential panic. Didn’t their parents know how important it is to have all this?

Nathan didn’t expect to be having these conversations. He was a middle-aged man who had worked in financial services in Pennsylvania for years, advising people on investments. One day, he was talking to an educator at a middle school and she explained that the kids she was working with, middle-class, not rich, had a problem. They thought satisfaction and meaning came from buying objects. When their parents couldn’t afford them, they seemed genuinely distressed. She asked, could Nathan come in and talk to the kids about financial realities?

He agreed cautiously. But that decision was going to set him on a steep learning curve, and lead him to challenge a lot of what he took for granted.

Nathan went in believing his task was obvious. He was there to educate the kids, and their parents, about how to budget, and how to live within their financial means. But then he hit this wall of need, this ravenous hunger for stuff. To him, it was baffling. Why do they want it so badly? What’s the difference between the sneakers with the Nike swoosh and the sneakers without? Why would that gap be so significant that it would send kids into a panic?

He began to wonder if he should be talking not about how to budget, but why the teenagers wanted these things in the first place. And it went deeper than that. There was something about seeing teenagers craving apparently meaningless material objects that got Nathan to think, as adults, are we so different?

Nathan had no idea how to start that conversation, so he began to wing it. And it led to a striking scientific experiment, where he teamed up with Tim Kasser.

A short time later, in a conference room in Minneapolis, Nathan met with the families who were going to be the focus of his experiment. They were a group of sixty parents and their teenage kids, sitting in front of him on chairs. He was going to have a series of long sessions with them over three months to explore these issues and the alternatives. (At the same time, the experiment followed a separate group of the same size who didn’t meet with Nathan or get any other help. They were the experiment’s control group.)

Nathan started the conversation by handing everyone worksheets with a list of open-ended questions. He explained there was no right answer: he just wanted them to start to think about these questions. One of them said: “For me, money is …” and you had to fill in the blank.

At first, people were confused. They’d never been asked a question like this before. Lots of the participants wrote that money is scarce. Or a source of stress. Or something they try not to think about. They then broke into groups of eight, and began to contemplate their answers, haltingly. Many of the kids had never heard their parents talk about money worries before.

Then the groups began to discuss the question, why do I spend? They began to list the reasons why they buy necessities (which are obvious: you’ve got to eat), and then the reasons why they buy the things that aren’t necessities. Sometimes, people would say, they bought nonessential stuff when they felt down. Often, the teenagers would say, they craved this stuff so badly because they wanted to belong, the branded clothes meant you were accepted by the group, or got a sense of status.

As they explored this in the conversation, it became clear quite quickly, without any prompting from Nathan, that spending often isn’t about the object itself. It is about getting to a psychological state that makes you feel better. These insights weren’t deeply buried. People offered them quite quickly, although when they said them out loud, they seemed a little surprised. They knew it just below the surface, but they’d never been asked to articulate that latent feeling before.

Then Nathan asked people to list what they really value, the things they think are most important in life. Many people said it was looking after your family, or telling the truth, or helping other people. One fourteen-year-old boy wrote simply “love,” and when he read it out, the room stopped for a moment, and “you could hear a pin drop,” Nathan told me. “What he was speaking to was, how important is it for me to be connected?”

Just asking these two questions, “What do you spend your money on?” and “What do you really value?”, made most people see a gap between the answers that they began to discuss. They were accumulating and spending money on things that were not, in the end, the things that they believed in their heart mattered. Why would that be?

Nathan had been reading up on the evidence about how we come to crave all this stuff. He learned that the average American is exposed to up to five thousand advertising impressions a day, from billboards to logos on T-shirts to TV advertisements. It is the sea in which we swim. And “the narrative is that if you [buy] this thing, it’ll yield more happiness, and so thousands of times a day you’re just surrounded with that message,” he told me. He began to ask: “Who’s shaping that narrative?” It’s not people who have actually figured out what will make us happy and who are charitably spreading the good news. It’s people who have one motive only, to make us buy their product.

In our culture, Nathan was starting to believe, we end up on a materialistic autopilot. We are constantly bombarded with messages that we will feel better (and less stinky, and less disgustingly shaped, and less all-around worthless) only if we buy some specific product; and then buy something more; and buy again, and on and on, until finally your family buys your coffin. What he wondered is, if people stopped to think about this and discussed alternatives, as his group was doing, could we turn off the autopilot, and take back control for ourselves?

At the next session, he asked the people in the experiment to do a short exercise in which everyone had to list a consumer item they felt they had to have right away. They had to describe what it was, how they first heard about it, why they craved it, how they felt when they got it, and how they felt after they’d had it for a while. For many people, as they talked this through, something became obvious. The pleasure was often in the craving and anticipation. We’ve all had the experience of finally getting the thing we want, getting it home, and feeling oddly deflated, only to find that before long, the craving cycle starts again.

People began to talk about how they had been spending, and they were slowly seeing what it was really all about. Often, not always, it was about “filling a hole. It fills some sort of loneliness gap.” But by pushing them toward that quick, rapidly evaporating high, it was also nudging them away from the things they really valued and that would make them feel satisfied in the long run. They felt they were becoming hollow.

There were some people, both teens and adults, who rejected this fiercely. They said that the stuff made them happy, and they wanted to stick with it. But most people in the group were eager to think differently.

They began to talk about advertising. At first, almost everyone declared that ads might affect other people but didn’t hold much sway over them. “Everyone wants to be smarter than the ad,” Nathan said to me later. But he guided them back to the consumer objects they had longed for. Before long, members of the group were explaining to each other: “There’s no way they’re spending billions of dollars if it’s not having an impact. They’re just not doing that. No company is going to do that.”

So far, it had been about getting people to question the junk values we have been fed for so long.

But then came the most important part of this experiment.

Nathan explained the difference that I talked about before between extrinsic and intrinsic values. He asked people to draw up a list of their intrinsic values, the things they thought were important, as an end in themselves and not because of what you get out of it. Then he asked: How would you live differently if you acted on these other values? Members of the groups discussed it.

They were surprised. We are constantly encouraged to talk about extrinsic values, but the moments when we are asked to speak our intrinsic values out loud are rare. Some said, for example, they would work less and spend more time with the people they loved. Nathan wasn’t making the case for any of this. Just asking a few open questions took most of the group there spontaneously.

Our intrinsic motivations are always there, Nathan realized, lying “dormant. It was brought out into the light,” he said. Conversations like this, Nathan was realizing, don’t just happen “in our culture today. We don’t allow space or create space for these really critical conversations to take place, so it just creates more and more isolation.”

Now that they had identified how they had been duped by junk values, and identified their intrinsic values, Nathan wanted to know: could the group choose, together, to start to follow their intrinsic goals? Instead of being accountable to advertising, could they make themselves accountable to their own most important values, and to a group that was trying to do the same thing? Could they consciously nurture meaningful values?

Now that each person had figured out his or her own intrinsic goals, they would report back at the next series of meetings about what they’d done to start moving toward them. They held each other accountable. They now had a space in which they could think about what they really wanted in life, and how to achieve it. They would talk about how they had found a way to work less and see their kids more, for example, or how they had taken up a musical instrument, or how they had started to write.

Nobody knew whether all this would have any real effect, though. Could these conversations really reduce people’s materialism and increase their intrinsic values?

Independent social scientists measured the levels of materialism of the participants at the start of the experiment, and they measured them again at the end. As he waited for the results, Nathan was nervous. This was a small intervention, in the middle of a lifetime of constant consumerist bombardment. Would it make any difference at all?

When the results came through, both Nathan and Tim were thrilled. Tim had shown before that materialism correlates strongly with increased depression and anxiety. This experiment showed, for the first time, that it was possible to intervene in people’s lives in a way that would significantly reduce their levels of materialism. The people who had gone through this experiment had significantly lower materialism and significantly higher selfesteem. It was a big and measurable effect.

It was an early shot of proof that a determined effort to reverse the values that are making us so unhappy works.

The people who took part in the study could never have made these changes alone, Nathan believes. “There was a lot of power in that connection and that community for people, removing the isolation and the fear. There’s a lot of fear around this topic.” It was only together, as a group, that they there were able to “peel those layers away, so you could actually get to the meaning, to the heart: their sense of purpose.”

I asked Nathan if we could integrate this into our ordinary lives, if we all need to form and take part in a kind of Alcoholics Anonymous for junk values, a space where we can all meet to challenge the depression-generating ideas we’ve been taught and learn to listen instead to our intrinsic values. “I would say, without question,” he said. Most of us sense we have been valuing the wrong things for too long. We need to create, he told me, a “counter-rhythm” to the junk values that have been making us mentally sick.

From his bare conference room in Minneapolis, Nathan has proven something, that we are not imprisoned in the values that have been making us feel so lousy for so long. By coming together with other people, and thinking deeply, and reconnecting with what really matters, we can begin to dig a tunnel back to meaningful values.

Also on TPPA = CRISIS

JUNK VALUES. CONSUMERISM LITERALLY IS DEPRESSING

Johann Hari

Just as we have shifted en masse from eating food to eating junk food, we have also shifted from having meaningful values to having junk values.

All this mass-produced fried chicken looks like food, and it appeals to the part of us that evolved to need food; yet it doesn’t give us what we need from food, nutrition. Instead, it fills us with toxins.

In the same way, all these materialistic values, telling us to spend our way to happiness, look like real values; they appeal to the part of us that has evolved to need some basic principles to guide us through life; yet they don’t give us what we need from values, a path to a satisfying life.

Studies show that materialistic people are having a worse time, day by day, on all sorts of fronts. They feel sicker, and they are angrier. Something about a strong desire for materialistic pursuits actually affects their day-to-day lives, and decreases the quality of their daily experience. They experienced less joy, and more despair.

For thousands of years, philosophers have been suggesting that if you overvalue money and possessions, or if you think about life mainly in terms of how you look to other people, you will be unhappy.

Modern research indicates that materialistic people, who think happiness comes from accumulating stuff and a superior status, have much higher levels of depression and anxiety. The more our kids value getting things and being seen to have things, the more likely they are to be suffering from depression and anxiety.

The pressure, in our culture, runs overwhelmingly one way, spend more; work more. We live under a system that constantly distracts us from what’s really good about life. We are being propagandized to live in a way that doesn’t meet our basic psychological needs, so we are left with a permanent, puzzling sense of dissatisfaction.

The more materialistic and extrinsically motivated you become, the more depressed you will be.

JUNK VALUES. CONSUMERISM LITERALLY IS DEPRESSING – Johann Hari

. . .

from

Lost Connections. Uncovering the Real Causes of Depression and the Unexpected Solutions

by Johann Hari

get it at Amazon.com

The Spirit Level. Why equality is better for everyone – Richard Wilkinson and Kate Pickett.

“For the first time in history, the poor are on average fatter than the rich.”
How is it that we have created so much mental and emotional suffering despite levels of wealth and comfort unprecedented in human history? The luxury and extravagance of our lives is so great that it threatens the planet.

At the pinnacle of human material and technical achievement, we find ourselves anxiety-ridden, prone to depression, worried about how others see us, unsure of our friendships, driven to consume and with little or no community life. Our societies are, despite their material success, increasingly burdened by their social failings.

If we are to gain further improvements in the real quality of life, we need to shift attention from material standards and economic growth to ways of improving the psychological and social wellbeing of whole societies. It is possible to improve the quality of life for everyone. We shall set out the evidence and our reasons for interpreting it the way we do, so that you can judge for yourself.

Social theories are partly theories about ourselves; indeed, they might almost be regarded as part of our selfawareness or self-consciousness of societies. The knowledge that we cannot carry on as we have, that change is necessary, is perhaps grounds for optimism: maybe we do, at last, have the chance to make a better world.

The truth is that both our broken society and broken economy resulted from the growth of inequality. The problems in rich countries are not caused by the society not being rich enough (or even by being too rich) but by the scale of material differences between people within each society being too big. What matters is where we stand in relation to others in our own society.

Why do we mistrust people more in the UK than in Japan? Why do Americans have higher rates of teenage pregnancy than the French? What makes the Swedish thinner than the Greeks? The answer: inequality.

This groundbreaking book, based on years of research, provides hard evidence to show:

  • How almost everything from life expectancy to depression levels, violence to illiteracy is affected not by how wealthy a society is, but how equal it is.
  • That societies with a bigger gap between rich and poor are bad for everyone in them including the well-off.
  • How we can flnd positive solutions and move towards a happier, fairer future.

Urgent, provocative and genuinely uplifting, The Spirit Level has been heralded as providing a new way of thinking about ourselves and our communities, and could change the way you see the world.

Richard Wilkinson has played a formative role in international research on the social determinants of health. He studied economic history at the London School of Economics before training in epidemiology and is Professor Emeritus at the University of Nottingham Medical School, Honorary Professor at University College London and Visiting Professor at the University of York.

Kate Pickett is Professor of Epidemiology at the University of York and a National Institute for Health Research Career Scientist. She studied physical anthropology at Cambridge, nutritional sciences at Cornell and epidemiology at the University of California Berkeley.

People usually exaggerate the importance of their own work and we worry about claiming too much. But this book is not just another set of nostrums and prejudices about how to put the world to rights. The work we describe here comes out of a very long period of research (over fifty person-years between us) devoted, initially, to trying to understand the causes of the big differences in life expectancy, the ‘health inequalities’ between people at different levels in the social hierarchy in modern societies. The focal problem initially was to understand why health gets worse at every step down the social ladder, so that the poor are less healthy than those in the middle, who in turn are less healthy than those further up.

Like others who work on the social determinants of health, our training in epidemiology means that our methods are those used to trace the causes of diseases in populations, trying to find out why one group of people gets a particular disease while another group doesn’t, or to explain why some disease is becoming more common. The same methods can, however, also be used to understand the causes of other kinds of problems, not just health.

Epidemiology is the study and analysis of the distribution (who, when, and where) and determinants of health and disease conditions in defined populations.

Just as the term ‘evidence-based medicine’ is used to describe current efforts to ensure that medical treatment is based on the best scientific evidence of what works and what does not, we thought of calling this book ‘Evidence-based Politics’. The research which underpins what we describe comes from a great many research teams in different universities and research organizations. Replicable methods have been used to study observable and objective outcomes, and peer-reviewed research reports have been published in academic, scientific journals.

This does not mean that there is no guesswork. Results always have to be interpreted, but there are usually good reasons for favouring one interpretation over another. Initial theories and expectations are often called into question by later research findings which make it necessary to think again. We would like to take you on the journey we have travelled, signposted by crucial bits of evidence and leaving out only the various culs-de-sac and wrong turnings that wasted so much time, to arrive at a better understanding of how we believe it is possible to improve the quality of life for everyone in modern societies. We shall set out the evidence and our reasons for interpreting it the way we do, so that you can judge for yourself.

At an intuitive level people have always recognized that inequality is socially corrosive. But there seemed little reason to think that levels of inequality in developed societies differed enough to expect any measurable effects. The reasons which first led one of us to look for effects seem now largely irrelevant to the striking picture which has emerged. Many discoveries owe as much to luck as judgement.

The reason why the picture we present has not been put together until now is probably that much of the data has only become available in recent years. With internationally comparable information not only on incomes and income distribution but also on different health and social problems, it could only have been a matter of time before someone came up with findings like ours. The emerging data have allowed us, and other researchers, to analyse how societies differ, to discover how one factor is related to another, and to test theories more rigorously.

It is easy to imagine that discoveries are more rapidly accepted in the natural than in the social sciences, as if physical theories are somehow less controversial than theories about the social world. But the history of the natural sciences is littered with painful personal disputes, which started off as theoretical disagreements but often lasted for the rest of people’s lives. Controversies in the natural sciences are usually confined to the experts: most people do not have strong views on rival theories in particle physics. But they do have views on how society works. Social theories are partly theories about ourselves; indeed, they might almost be regarded as part of our selfawareness or self-consciousness of societies. While natural scientists do not have to convince individual cells or atoms to accept their theories, social theorists are up against a plethora of individual views and powerful vested interests.

In 1847, Ignaz Semmelweiss discovered that if doctors washed their hands before attending women in childbirth it dramatically reduced deaths from puerperal fever. But before his work could have much benefit he had to persuade people, principally his medical colleagues to change their behaviour. His real battle was not his initial discovery but what followed from it. His views were ridiculed and he was driven eventually to insanity and suicide. Much of the medical profession did not take his work seriously until Louis Pasteur and Joseph Lister had developed the germ theory of disease, which explained why hygiene was important.

We live in a pessimistic period. As well as being worried by the likely consequences of global warming, it is easy to feel that many societies are, despite their material success, increasingly burdened by their social failings. And now, as if to add to our woes, we have the economic recession and its aftermath of high unemployment. But the knowledge that we cannot carry on as we have, that change is necessary, is perhaps grounds for optimism: maybe we do, at last, have the chance to make a better world. The extraordinarily positive reception of the hardback editon of this book confirms that there is a widespread appetite for change and a desire to find positive solutions to our problems.

We have made only minor changes to this edition. Details of the statistical sources, methods and results, from which we thought most readers would want to be spared, are now provided in an appendix for those with a taste for data. Chapter 13, which is substantially about causation, has been slightly reorganized and strengthened. We have also expanded our discussion of what has made societies substantially more or less equal in the past. Because we conclude that these changes have been driven by changes in political attitudes, we think it is a mistake to discuss policy as if it were a matter of finding the right technical fix. As there are really hundreds of ways that societies can become more equal if they choose to, we have not nailed our colours to one or other set of policies. What we need is not so much a clever solution as a society which recognizes the benefits of greater equality.

If correct, the theory and evidence set out in this book tells us how to make substantial improvements in the quality of life for the vast majority of the population. Yet unless it is possible to change the way most people see the societies they live in, the theory will be stillborn. Public opinion will only support the necessary political changes if something like the perspective we outline in this book permeates the public mind.

We have therefore set up a not-for-profit organization called The Equality Trust (described at the end of this book) to make the kind of evidence set out in the following pages better known and to suggest that there is a way out of the woods for us all.

PART ONE

Material Success, Social Failure

1 The end of an era

“I care for riches, to make gifts to friends, or lead a sick man back to health with ease and plenty. Else small aid is wealth for daily gladness; once a man be done with hunger, rich and poor are all as one.” Euripides, Electra

It is a remarkable paradox that, at the pinnacle of human material and technical achievement, we find ourselves anxiety-ridden, prone to depression, worried about how others see us, unsure of our friendships, driven to consume and with little or no community life. Lacking the relaxed social contact and emotional satisfaction we all need, we seek comfort in overeating, obsessive shopping and spending, or become prey to excessive alcohol, psychoactive medicines and illegal drugs.

How is it that we have created so much mental and emotional suffering despite levels of wealth and comfort unprecedented in human history? Often what we feel is missing is little more than time enjoying the company of friends, yet even that can seem beyond us. We talk as if our lives were a constant battle for psychological survival, struggling against stress and emotional exhaustion, but the truth is that the luxury and extravagance of our lives is so great that it threatens the planet.

Research from the Harwood Institute for Public Innovation (commissioned by the Merck Family Foundation) in the USA shows that people feel that ‘materialism’ somehow comes between them and the satisfaction of their social needs. A report entitled Yearning for Balance, based on a nationwide survey of Americans, concluded that they were ‘deeply ambivalent about wealth and material gain’. A large majority of people wanted society to ‘move away from greed and excess toward a way of life more centred on values, community, and family’. But they also felt that these priorities were not shared by most of their fellow Americans, who, they believed, had become ‘increasingly atomized, selfish, and irresponsible’. As a result they often felt isolated. However, the report says, that when brought together in focus groups to discuss these issues, people were ‘surprised and excited to find that others share[d] their views’. Rather than uniting us with others in a common cause, the unease we feel about the loss of social values and the way we are drawn into the pursuit of material gain is often experienced as if it were a purely private ambivalence which cuts us off from others.

Mainstream politics no longer taps into these issues and has abandoned the attempt to provide a shared vision capable of inspiring us to create a better society. As voters, we have lost sight of any collective belief that society could be different.

Instead of a better society, the only thing almost everyone strives for is to better their own position as individuals within the existing society.

The contrast between the material success and social failure of many rich countries is an important signpost. It suggests that, if we are to gain further improvements in the real quality of life, we need to shift attention from material standards and economic growth to ways of improving the psychological and social wellbeing of whole societies. However, as soon as anything psychological is mentioned, discussion tends to focus almost exclusively on individual remedies and treatments. Political thinking seems to run into the sand.

It is now possible to piece together a new, compelling and coherent picture of how we can release societies from the grip of so much dysfunctional behaviour. A proper understanding of what is going on could transform politics and the quality of life for all of us. It would change our experience of the world around us, change what we vote for, and change what we demand from our politicians.

In this book we show that the quality of social relations in a society is built on material foundations. The scale of income differences has a powerful effect on how we relate to each other. Rather than blaming parents, religion, values, education or the penal system, we will show that the scale of inequality provides a powerful policy lever on the psychological wellbeing of all of us. Just as it once took studies of weight gain in babies to show that interacting with a loving care-giver is crucial to child development, so it has taken studies of death rates and of income distribution to show the social needs of adults and to demonstrate how societies can meet them.

Long before the financial crisis which gathered pace in the later part of 2008, British politicians commenting on the decline of community or the rise of various forms of anti-social behaviour, would sometimes refer to our ‘broken society’. The financial collapse shifted attention to the broken economy, and while the broken society was sometimes blamed on the behaviour of the poor, the broken economy was widely attributed to the rich.

Stimulated by the prospects of ever bigger salaries and bonuses, those in charge of some of the most trusted financial institutions threw caution to the wind and built houses of cards which could stand only within the protection of a thin speculative bubble. But the truth is that both the broken society and the broken economy resulted from the growth of inequality.

WHERE THE EVIDENCE LEADS

We shall start by outlining the evidence which shows that we have got close to the end of what economic growth can do for us. For thousands of years the best way of improving the quality of human life was to raise material living standards. When the wolf was never far from the door, good times were simply times of plenty. But for the vast majority of people in affluent countries the difficulties of life are no longer about filling our stomachs, having clean water and keeping warm. Most of us now wish we could eat less rather than more. And, for the first time in history, the poor are on average fatter than the rich.

Economic growth, for so long the great engine of progress, has, in the rich countries, largely finished its work. Not only have measures of wellbeing and happiness ceased to rise with economic growth but, as affluent societies have grown richer, there have been long-term rises in rates of anxiety, depression and numerous other social problems. The populations of rich countries have got to the end of a long historical journey.

Figure 1.1 Only in its early stages does economic development boost life expectancy.
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The course of the journey we have made can be seen in Figure 1.1. It shows the trends in life expectancy in relation to Gross National Income per head in countries at various stages of economic development. Among poorer countries, life expectancy increases rapidly during the early stages of economic development, but then, starting among the middle-income countries, the rate of improvement slows down. As living standards rise and countries get richer and richer, the relationship between economic growth and life expectancy weakens. Eventually it disappears entirely and the rising curve in Figure 1.1 becomes horizontal showing that for rich countries to get richer adds nothing further to their life expectancy. That has already happened in the richest thirty or so countries nearest the top righthand corner of Figure 1.1.

The reason why the curve in Figure 1.1 levels out is not because we have reached the limits of life expectancy. Even the richest countries go on enjoying substantial improvements in health as time goes by. What has changed is that the improvements have ceased to be related to average living standards. With every ten years that passes, life expectancy among the rich countries increases by between two and three years. This happens regardless of economic growth, so that a country as rich as the USA no longer does better than Greece or New Zealand, although they are not much more than half as rich. Rather than moving out along the curve in Figure 1.1, what happens as time goes by is that the curve shifts upwards: the same levels of income are associated with higher life expectancy. Looking at the data, you cannot help but conclude that as countries get richer, further increases in average living standards do less and less for health.

While good health and longevity are important, there are other components of the quality of life. But just as the relationship between health and economic growth has levelled off, so too has the relationship with happiness. Like health, how happy people are rises in the early stages of economic growth and then levels off. This is a point made strongly by the economist Richard Layard, in his book on happiness.

Figure 1.2 Happiness and average incomes (data for UK unavailable).
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Figures on happiness in different countries are probably strongly affected by culture. In some societies not saying you are happy may sound like an admission of failure, while in another claiming to be happy may sound selfsatisfied and smug. But, despite the difficulties, Figure 1.2 shows the ‘happiness curve’ levelling off in the richest countries in much the same way as life expectancy. In both cases the important gains are made in the earlier stages of economic growth, but the richer a country gets, the less getting still richer adds to the population’s happiness. In these graphs the curves for both happiness and life expectancy flatten off at around $25,000 per capita, but there is some evidence that the income level at which this occurs may rise over time.

The evidence that happiness levels fail to rise further as rich countries get still richer does not come only from comparisons of different countries at a single point in time (as shown in Figure 1.2). In a few countries, such as Japan, the USA and Britain, it is possible to look at changes in happiness over sufficiently long periods of time to see whether they rise as a country gets richer. The evidence shows that happiness has not increased even over periods long enough for real incomes to have doubled. The same pattern has also been found by researchers using other indicators of wellbeing such as the ‘measure of economic welfare’ or the ‘genuine progress indicator’, which try to calculate net benefits of growth after removing costs like traffic congestion and pollution.

So whether we look at health, happiness or other measures of wellbeing there is a consistent picture. In poorer countries, economic development continues to be very important for human wellbeing. Increases in their material living standards result in substantial improvements both in objective measures of wellbeing like life expectancy, and in subjective ones like happiness. But as nations join the ranks of the affluent developed countries, further rises in income count for less and less.

This is a predictable pattern. As you get more and more of anything, each addition to what you have, whether loaves of bread or cars, contributes less and less to your wellbeing. If you are hungry, a loaf of bread is everything, but when your hunger is satisfied, many more loaves don’t particularly help you and might become a nuisance as they go stale.

Sooner or later in the long history of economic growth, countries inevitably reach a level of affluence where ‘diminishing returns’ set in and additional income buys less and less additional health, happiness or wellbeing. A number of developed countries have now had almost continuous rises in average incomes for over 150 years and additional wealth is not as beneficial as it once was.

The trends in different causes of death confirm this interpretation. It is the diseases of poverty which first decline as countries start to get richer. The great infectious diseases such as tuberculosis, cholera or measles which are still common in the poorest countries today, gradually cease to be the most important causes of death. As they disappear, we are left with the so-called diseases of affluence, the degenerative cardiovascuiar diseases and cancers. While the infectious diseases of poverty are particularly common in childhood and frequently kill even in the prime of life, the diseases of affluence are very largely diseases of later life.

One other piece of evidence confirms that the reason why the curves in Figures 1.1 and 1.2 level off is because countries have reached a threshold of material living standards after which the benefits of further economic growth are less substantial. It is that the diseases which used to be called the ‘diseases of affluence’ became the diseases of the poor in affluent societies. Diseases like heart disease, stroke and obesity used to be more common among the rich. Heart disease was regarded as a businessman’s disease and it used to be the rich who were fat and the poor who were thin. But from about the 1950s onwards, in one developed country after another, these patterns reversed. Diseases which had been most common among the better-off in each society reversed their social distribution to become more common among the poor.

THE ENVIRONMENTAL LIMITS TO GROWTH

At the same time as the rich countries reach the end of the real benefits of economic growth, we have also had to recognize the problems of global warming and the environmental limits to growth. The dramatic reductions in carbon emissions needed to prevent runaway climate change and rises in sea levels may mean that even present levels of consumption are unsustainable particularly if living standards in the poorer, developing, world are to rise as they need to. In Chapter 15 we shall discuss the ways in which the perspective outlined in this book fits in with policies designed to reduce global warming.

INCOME DIFFERENCES WITHIN AND BETWEEN SOCIETIES

We are the first generation to have to find new answers to the question of how we can make further improvements to the real quality of human life. What should we turn to if not to economic growth? One of the most powerful clues to the answer to this question comes from the fact that we are affected very differently by the income differences within our own society from the way we are affected by the differences in average income between one rich society and another.

In Chapters 4-12 we focus on a series of health and social problems like violence, mental illness, teenage births and educational failure, which within each country are all more common among the poor than the rich. As a result, it often looks as if the effect of higher incomes and living standards is to lift people out of these problems. However, when we make comparisons between different societies, we find that these social problems have little or no relation to levels of average incomes in a society.

Take health as an example. Instead of looking at life expectancy across both rich and poor countries as in Figure 1.1, look just at the richest countries. Figure 1.3 shows just the rich countries and confirms that among them some countries can be almost twice as rich as others without any benefit to life expectancy. Yet within any of them death rates are closely and systematically related to income.

Figure 1.3 Life expectancy is unrelated to differences in average income between rich countries.
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Figure 1.4 shows the relation between death rates and income levels within the USA. The death rates are for people in zip code areas classified by the typical household income of the area in which they live. On the right are the richer zip code areas with lower death rates, and on the left are the poorer ones with higher death rates. Although we use American data to illustrate this, similar health gradients, of varying steepness, run across almost every society. Higher incomes are related to lower death rates at every level in society.

Figure 1.4 Death rates are closely related to differences in income within societies.
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Note that this is not simply a matter of the poor having worse health than everyone else. What is so striking about Figure 1.4 is how regular the health gradient is right across society it is a qradient which affects us all.

Within each country, people’s health and happiness are related to their incomes. Richer people tend, on average, to be healthier and happier than poorer people in the same society. But comparing rich countries it makes no difference whether on average people in one society are almost twice as rich as people in another.

What sense can we make of this paradox that differences in average income or living standards between whole populations or countries don’t matter at all, but income differences within those same populations matter very much indeed? There are two plausible explanations. One is that what matters in rich countries may not be your actual income level and living standard, but how you compare with other people in the same society. Perhaps average standards don’t matter and what does is simply whether you are doing better or worse than other people, where you come in the social pecking order.

The other possibility is that the social gradient in health shown in Figure 1.4 results not from the effects of relative income or social status on health, but from the effects of social mobility, sorting the healthy from the unhealthy. Perhaps the healthy tend to move up the social ladder and the unhealthy end up at the bottom.

This issue will be resolved in the next chapter. We shall see whether compressing, or stretching out, the income differences in a society matters. Do more and less equal societies suffer the same overall burden of health and social problems?

2 Poverty or inequality?

“Poverty is not a certain small amount of goods, nor is it just a relation between means and ends; above all it is a relation between people. Poverty is a social status It has grown as an invidious distinction between classes”

Marshall Sahlins, Stone Age Economics

HOW MUCH INEQUALITY?

In the last chapter we saw that economic growth and increases in average incomes have ceased to contribute much to wellbeing in the rich countries. But we also saw that within societies health and social problems remain strongly associated with incomes. In this chapter we will see whether the amount of income inequality in a society makes any difference.

Figure 2.1 How much richer are the richest 20 per cent than the poorest 20 per cent in each country?
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Figure 2.1 shows how the size of income differences varies from one developed country to another. At the top are the most equal countries and at the bottom are the most unequal. The length of the horizontal bars shows how much richer the richest 20 per cent of the population is in each country compared to the poorest 20 per cent.

Within countries such as Japan and some of the Scandinavian countries at the top of the chart, the richest 20 per cent are less than four times as rich as the poorest 20 per cent. At the bottom of the chart are countries in which these differences are at least twice as big, including two in which the richest 20 per cent get about nine times as much as the poorest. Among the most unequal are Singapore, USA, Portugal and the United Kingdom. (The figures are for household income, after taxes and benefits, adjusted for the number of people in each household.)

There are lots of ways of measuring income inequality and they are all so closely related to each other that it doesn’t usually make much difference which you use. Instead of the top and bottom 20 per cent, we could compare the top and bottom 10 or 30 per cent. Or we could have looked at the proportion of all incomes which go to the poorer half of the population. Typically, the poorest half of the population get something like 20 or 25 per cent of all incomes and the richest half get the remaining 75 or 80 per cent.

Other more sophisticated measures include one called the Gini coefficient. It measures inequality across the whole society rather than simply comparing the extremes. If all income went to one person (maximum inequality) and everyone else got nothing, the Gini coefficient would be equal to 1. If income was shared equally and everyone got exactly the same (perfect equality), the Gini would equal 0. The lower its value, the more equal a society is. The most common values tend to be between 0.3 and 0.5. Another measure of inequality is called the Robin Hood Index because it tells you what proportion of a society’s income would have to be taken from the rich and given to the poor to get complete equality.

To avoid being accused of picking and choosing our measures, our approach in this book has been to take measures provided by official agencies rather than calculating our own. We use the ratio of the income received by the top to the bottom 20 per cent whenever we are comparing inequality in different countries: it is easy to understand and it is one of the measures provided ready-made by the United Nations. When comparing inequality in US states, we use the Gini coefficient: it is the most common measure, it is favoured by economists and it is available from the US Census Bureau. In many academic research papers we and others have used two different inequality measures in order to show that the choice of measures rarely has a significant effect on results.

DOES THE AMOUNT OF INEQUALITY MAKE A DIFFERENCE?

Having got to the end of what economic growth can do for the quality of life and facing the problems of environmental damage, what difference do the inequalities shown in Figure 2.1 make?

It has been known for some years that poor health and violence are more common in more unequal societies. However, in the course of our research we became aware that almost all problems which are more common at the bottom of the social ladder are more common in more unequal societies. It is not just ill-health and violence, but also, as we will show in later chapters, a host of other social problems. Almost all of them contribute to the widespread concern that modern societies are, despite their affluence, social failures.

To see whether these problems were more common in more unequal countries, we collected internationally comparable data on health and as many social problems as we could find reliable figures for.

The list we ended up with included:

  • level of trust
  • mental illness (including drug and alcohol addiction)
  • life expectancy and infant mortality
  • obesity
  • children’s educational performance
  • teenage births
  • homicides
  • imprisonment rates
  • social mobility (not available for US states)

Occasionally what appear to be relationships between different things may arise spuriously or by chance. In order to be confident that our findings were sound we also collected data for the same health and social problems or as near as we could get to the same for each of the fifty states of the USA. This allowed us to check whether or not problems were consistently related to inequality in these two independent settings. As Lyndon Johnson said, ‘America is not merely a nation, but a nation of nations.’

To present the overall picture, we have combined all the health and social problem data for each country, and separately for each US state, to form an Index of Heaith and Social Problems for each country and US state. Each item in the indexes carries the same weight so, for example, the score for mental health has as much influence on a society’s overall score as the homicide rate or the teenage birth rate. The result is an index showing how common all these health and social problems are in each country and each US state. Things such as life expectancy are reverse scored, so that on every measure higher scores reflect worse outcomes. When looking at the Figures, the higher the score on the Index of Health and Social Problems, the worse things are. (For information on how we selected countries shown in the graphs we present in this book, please see the Appendix.)

Figure 2.2 Health and social problems are closely related to inequality among rich countries.
.

We start by showing, in Figure 2.2, that there is a very strong tendency for ill-health and social problems to occur less frequently in the more equal countries. With increasing inequality (to the right on the horizontal axis), the higher is the score on our Index of Health and Social Problems. Health and social problems are indeed more common in countries with bigger income inequalities. The two are extraordinarily closely related, chance alone would almost never produce a scatter in which countries lined up like this.

Figure 2.3 Health and social problems are only weakly related to national average income among rich countries.
.

To emphasize that the prevalence of poor health and social problems in whole societies really is related to inequality rather than to average living standards, we show in Figure 2.3 the same index of health and social problems but this time in relation to average incomes (National Income per person). It shows that there is no similarly clear trend towards better outcomes in richer countries. This confirms what we saw in Figures 1.1 and 1.2 in the first chapter. However, as well as knowing that health and social problems are more common among the less well-off within each society (as shown in Figure 1.4), we now know that the overall burden of these problems is much higher in more unequal societies.

To check whether these results are not just some odd fluke, let us see whether similar patterns also occur when we look at the fifty states of the USA. We were able to find data on almost exactly the same health and social problems for US states as we used in our international index.

Figure 2.4 Health and social problems are related to inequality in US states.
.

Figure 2.4 shows that the Index of Health and Social Problems is strongly related to the amount of inequality in each state, while Figure 2.5 shows that there is no clear relation between it and average income levels.

Figure 2.5 Health and social problems are only weakly related to average income in US states.
.

The evidence from the USA confirms the international picture. The position of the US in the international graph (Figure 2.2) shows that the high average income level in the US as a whole does nothing to reduce its health and social problems relative to other countries.

We should note that part of the reason why our index combining data for ten different health and social problems is so closely related to inequality is that combining them tends to emphasize what they have in common and downplays what they do not. In Chapters 4-12 we will examine whether each problem taken on its own is related to inequality and will discuss the various reasons why they might be caused by inequality.

This evidence cannot be dismissed as some statistical trick done with smoke and mirrors. What the close fit shown in Figure 2.2 suggests is that a common element related to the prevalence of all these health and social problems is indeed the amount of inequality in each country. All the data come from the most reputable sources from the World Bank, the World Health Organization, the United Nations and the Organization for Economic Cooperation and Development (OECD), and others.

Could these relationships be the result of some unrepresentative selection of problems? To answer this we also used the ‘Index of child wellbeing in rich countries’ compiled by the United Nations Children’s Fund (UNICEF). It combines forty different indicators covering many different aspects of child wellbeing. (We removed the measure of child relative poverty from it because it is, by definition, closely related to inequality.)

Figurer 2.6 The UNICEF index of child wellbeing in rich countries is related to inequality.
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Figure 2.6 shows that child wellbeing is strongly related to inequality, and Figure 2.7 shows that it is not at all related to average income in each country.

Figure 2.7 The UNICEF index of child wellbeing is not related to Gross National Income per head in rich countries.
.

SOCIAL GRADIENTS

As we mentioned at the end of the last chapter, there are perhaps two widespread assumptions as to why people nearer the bottom of society suffer more problems. Either the circumstances people live in cause their problems, or people end up nearer the bottom of society because they are prone to problems which drag them down. The evidence we have seen in this chapter puts these issues in a new light.

Let’s first consider the view that society is a great sorting system with people moving up or down the social ladder according to their personal characteristics and vulnerabilities. While things such as having poor health, doing badly at school or having a baby when still a teenager all load the dice against your chances of getting up the social ladder, sorting alone does nothing to explain why more unequal societies have more of all these problems than less unequal ones. Social mobility may partly explain whether problems congregate at the bottom, but not why more unequal societies have more problems overall.

The view that social problems are caused directly by poor material conditions such as bad housing, poor diets, lack of educational opportunities and so on implies that richer developed societies would do better than the others. But this is a long way from the truth: some of the richest countries do worst.

It is remarkable that these measures of health and social problems in the two different settings, and of child wellbeing among rich countries, all tell so much the same story.

The problems in rich countries are not caused by the society not being rich enough (or even by being too rich) but by the scale of material differences between people within each society being too big. What matters is where we stand in relation to others in our own society.

Of course a small proportion of the least well-off people even in the richest countries sometimes find themselves without enough money for food. However, surveys of the 12.6 per cent of Americans living below the federal poverty line (an absolute income level rather than a relative standard such as half the average income) show that 80 per cent of them have airconditioning, almost 75 per cent own at least one car or truck and around 33 per cent have a computer, a dishwasher or a second car.

What this means is that when people lack money for essentials such as food, it is usually a reflection of the strength of their desire to live up to the prevailing standards. You may, for instance, feel it more important to maintain appearances by spending on clothes while stinting on food. We knew of a young man who was unemployed and had spent a month’s income on a new mobile phone because he said girls ignored people who hadn’t got the right stuff. As Adam Smith emphasized, it is important to be able to present oneself creditably in society without the shame and stigma of apparent poverty.

However, just as the gradient in health ran right across society from top to bottom, the pressures of inequality and of wanting to keep up are not confined to a small minority who are poor. Instead, the effects are as we shall see widespread in the population.

. . .

from

The Spirit Level. Why equality is better for everyone

by Richard Wilkinson and Kate Pickett

get it at Amazon.com

THIS TIME IS NO DIFFERENT. IMF’s dire warning on global economy – Liam Dann * Why a New Multilateralism Now? – David Lipton.

Merry Christmas and happy new financial crisis.

History suggests we are due for another financial crisis and right now the world is in no shape to cope with one.

With ingenuity and international cooperation, we can make the most of new technologies and new challenges, and create a shared and sustained prosperity.


With interest rates still low, central banks simply don’t have the firepower they did in 2008 to deal with a deep recession.

The official outlook for New Zealand’s economy remains solid with GDP growth expected to stay safely north of 2.5 per cent.

But these kind of forecasts will mean little if the world heads into a serious financial crisis.

NZ Herald

Why a New Multilateralism Now

David Lipton, IMF First Deputy Managing Director

Good morning.

Thank you for the introduction.

I appreciate the invitation to speak here today. This conference is tackling issues that have a great bearing on the stability of the world economy. Having just passed the 10th anniversary of the start of the Global Financial Crisis, and now looking forward, I’d like to address what I see as this morning’s key topic: the next financial crisis.

History suggests that an economic downturn lurks somewhere over the horizon. Many are already speculating as to exactly when, where, and why it might arise. While we can’t know all that, we ought to be focusing right now on how to forestall its arrival and how to limit it to a “garden variety” recession when it arrives, meaning, how to avoid creating another systemic crisis. Over the past two years, the IMF has called on governments to put in place policies aimed at just that goal, as we have put it, “fix the roof while the sun shines.” But like many of you, I see storm clouds building, and fear the work on crisis prevention is incomplete.

Before asking what should be done, let’s analyze whether the international community has the wherewithal to respond to the next crisis, should it occur. And here I mean both individual countries, and the international organizations tasked to act as first responders. Should we be confident that the resources, policy instruments, and regulatory frameworks at our disposal will prove potent enough to counter and contain the next recession? Consider the main policy options.

Policy Options for the Next Recession

On monetary policy, much has been said about whether central banks will be able to respond to a deep or prolonged downturn. For example, past U.S. recessions have been met with 500 basis points or more of easing by the Fed. With policy rates so low at present in so many places, that response will not be available. Central banks would likely end up exploring ever more unconventional measures. But with their effectiveness uncertain, we ought to be concerned about the potency of monetary policy.

We read every day that for fiscal policy, the room for maneuver has been narrowing in many countries. Public debt has risen and, in many countries, deficits remain too high to stabilize or reduce debt. Now to be fair, we can presume that if the next slowdown creates unemployment and slack, multipliers will grow larger, likely restoring some potency to fiscal policy, even at high debt levels. But we should not expect governments to end up with the ample space to respond to a downturn that they had ten years ago. Moreover, with high sovereign debt levels, decisions to adopt stimulus may be a hard sell politically.

Given the enduring public resentments borne by the Global Financial Crisis, a recession deep enough to endanger the finances of homeowners or small businesses would likely lead to a strong political call to help relieve debt burdens. That could further stress already stretched public finances.

And if recession once again impairs banks, the recourse to bailouts is now limited in law, following financial regulatory reforms that call for bail-ins of owners and lenders. Those new systems for bail-ins remain underfunded and untested.

Finally, the impairment of key U.S. capital markets during the global financial crisis, which might have produced crippling spillovers across the globe, was robustly contained by unorthodox Fed action supported by Treasury backstop funding. That capacity is also unlikely to be readily available again.

The point is that national policy options and public financial resources may be much more constrained than in the past. The right lesson to take from that possibility is for each country to be much more careful to sustain growth, to limit vulnerabilities, and to prepare for whatever may come.

But the reality is that many countries are not pursuing policies that will bolster their growth in a sustainable fashion. The expansion actually has become less balanced across regions over the past year, and we are witnessing a buildup of vulnerabilities: higher sovereign and corporate debt, tighter financial conditions, incomplete reform efforts, and rising geopolitical tensions.

Five Key Policy Challenges

So, let me turn to five key challenges that could affect the next downturn, areas where governments face a choice to take proactive steps now, or not, and where inaction would probably make matters worse.

The first challenge is the simple and familiar admonition: “First, do no harm.” This is worthy advice for doctors and economic policymakers. Let me mention some examples.

In the case of U.S. fiscal policy over the past year, the combination of spending increases and tax cuts was intended to provide a shot of adrenalin to the U.S. economy and improve investment incentives. However, coming at a time when advanced recovery meant little need for stimulus, this choice runs the three risks of increasing the potential need for Fed tightening; raising deficits and public debt; and spending resources that might better be put aside to combat the next downturn.

Another example is the recent escalation of tariffs and trade tensions. Fortunately, the U.S. and China agreed in Buenos Aires to call a ceasefire. That was a positive development. There certainly are shortcomings in the global trading system, and countries experiencing disruption from trade have some legitimate concerns about a number of trade practices. But the only safe way to address these issues is through dialogue and cooperation.

The IMF has been advocating de-escalation and dialogue for some time. That is because the alternative is hard to contemplate. We estimate that if all of the tariffs that have been threatened are put in place, as much as three-quarters of a percent of global GDP would be lost by 2020. That would be a self-inflicted wound.

So it is vital that this ceasefire leads to a durable agreement that avoids an intensification or spread of tensions.

Now to the second challenge, which is closely tied to the trade issue: China’s emergence as an economic powerhouse. In many ways, this is one of the success stories of our era, showing that global integration can lead to rapid growth, poverty elimination, and new global supply chains lifting up other countries.

But as Winston Churchill once said of the U.S. during World War II, “the price of greatness is responsibility.”

China’s Global Role

Chinese policies that may have been globally inconsequential and thus acceptable when China joined the WTO and had a $1 trillion economy are now consequential to much of the world. That’s because China now is a globally integrated $13 trillion economy whose actions have global reverberations. If China is to continue to benefit from globalization and support the aspirations of developing countries, it will need to focus on how to limit adverse spillovers from its own policies and invest in ensuring that globalization can be sustainable.

Moreover, China would likely gain at home by addressing many of the policy issues that have been contentious, for example through stronger protections for intellectual property, which will benefit China as it becomes a world leader in technologies; reduced trade barriers, especially related to investment rules and government procurement procedures, which will produce cost-reducing and productivity enhancing competition that will benefit the Chinese people in the long run, and an acceleration of market-oriented economic reforms that will help China make more efficient use of scarce resources.

This notion of global responsibility applies to Europe as well, and this is the third challenge. Our forecasts show growth in the euro area and the UK falling short of previous projections, and modest potential growth going forward.

The future of the European economy will be shaped by the way the EU addresses its architectural and macroeconomic challenges and by Brexit. The recent EMU agreement on reforms is welcome. Going forward, the Euro area would gain by pushing further to shore up its institutional foundations.

The absence of a common fiscal policy limits Europe’s ability to share risks and respond to shocks that can radiate through its financial system. And crisis response will be constrained because too much power remains vested in national regulators and supervisors at the expense of an integrated approach across the continent.

All of this prevents Europe from playing a global role commensurate with the size and importance of the euro area economy.

The Task for Emerging Markets

The fourth challenge is in the emerging markets. For all of their extraordinary dynamism, we have seen a divergence among emerging markets over the past year: between those who have not shored up their defenses against shocks, including preparation for the normalization of interest rates in the advanced economies; and those that have taken advantage of the global recovery to address their underlying vulnerabilities.

Capital outflows over the past several months have shown how markets are judging the perceived weaknesses in individual countries. If global conditions become more complicated, these outflows could increase and become more volatile.

The fifth and final challenge is the topic you will take up this afternoon: the role of multilateral institutions.

We know that these institutions have played a crucial role in keeping the global economy on track. In the nearly 75 years since the IMF was set up, our world has undergone multiple transformations, from post-war reconstruction and the Bretton Woods system of fixed exchange rates to the era of flexible rates; the rise of emerging economies; the collapse of the Soviet Union and transition to market economies; as well as a series of financial crises: the Mexican debt crisis, the Asian Crisis, and the Global Financial Crisis.

At each stage, we at the IMF have been called upon to evolve and even remake ourselves.

Now, we see a rising tide of doubt about globalization and discontent with multilateralism in some advanced economies. Just as with the IMF, it is fair for the international community to ask for modernization in its institutions and organizations, to seek reforms to ensure that institutions serve effectively their core purposes.

This applies to groupings such as the G20, as well as international organizations.

So, it was heartening to see the G20 Leaders to call for reform of the WTO when they came together in Buenos Aires. This reform initiative, which has the potential to modernize the global trading system and restore support for cooperative approaches, should now go forward.

The policy challenges we face are clear. As I have suggested, governments have their work cut out for them and may have to contend with less potent policy tools. It is essential they do what they can now to address vulnerabilities and avoid actions that exacerbate the next downturn.

The Multilateral Response

But we should prepare for the possibility that weaker national tools may mean limited effectiveness, and thus may result in greater reliance on multilateral responses and on the global financial safety net.

The IMF’s lending capacity was increased during the global financial crisis to about one trillion dollars – a forceful response from the membership at a time of dire need. One lesson from that crisis was that the IMF went into it under-resourced; we should try to avoid that next time.

From that point of view it was encouraging that the G20 in Buenos Aires underlined its continued commitment to strengthen the safety net, with a strong and adequately financed IMF at its center. It is important that the leaders pledged to conclude the next discussion of our funding, the quota review, next year.

But the stakes are bigger than any one decision about IMF funding. IMF Managing Director Christine Lagarde has called for a “new multilateralism,” one that is dedicated to improving the lives of all this world’s citizens. That ensures that the economic benefits of globalization are shared much more broadly. That focuses on governments and institutions that are both accountable and working together for the common good. And that can take on the many transnational challenges that no one government alone, not even a few governments working together, can handle: climate change, cyber-crime, massive refugee flows, failures of governance, and corruption.

Working together, we will be better able to prevent a damaging downturn in the coming years and a dystopian future in the coming decades. With ingenuity and international cooperation, we can make the most of new technologies and new challenges, and create a shared and sustained prosperity.

Thank you.

Inequality and Revolution – Bryan Bruce * An Analysis of ‘The New Zealand Way’ – Georg Menz.

Today inequality is an all too familiar word in our country and the coalition’s handing of the economy isn’t fixing it.

Why? Because it’s the same neoliberal approach the last National government took and the Clarke government before it .. going all the way back to David Lange and Roger Douglas who introduced this economic virus in 1984.

So how and when will things change?

Bryan Bruce . . . The Daily Blog

The New Zealand Way

Georg Menz

How did a country known for its progressive policies, its welfare state and its anti nuclear and environmental policies so quickly and emphatically embrace the tenets of Neoliberalism and the New Right?

New Zealand, in the 1980s, went from being one of the most regulated countries in the OECD to being one of the most deregulated.

. . . An Analysis of ‘The New Zealand Way’ – Georg Menz

“Out-Thatchering Mrs.Thatcher”. USER PAYS, NEW ZEALAND’S NEOLIBERAL CONVERSION, Rogerpolitics – Chris Trotter * An analysis of ‘The New Zealand Way’ – Georg Menz.

How did a country known for its progressive policies, its welfare state and its anti nuclear and environmental policies so quickly and emphatically embrace the tenets of Neoliberalism and the New Right?

New Zealand, in the 1980s, went from being one of the most regulated countries in the OECD to being one of the most deregulated. It underwent a very painful period of transition and adjustment during the reforms. Even now the beneficial effects are far from obvious. Market liberalisation has come at a very high social cost. Poverty and social inequality are rising. New Zealand presents a paradigmatic case of complete market liberalisation and the embrace of neoliberal doctrines.

With remarkable alacrity, the ideological and practical political infrastructure required to support the new economic regime was cemented into place. In the nation’s schools and universities; in it’s publicly and privately owned news media; in its local and national institutions, Rogerpolitics became the new orthodoxy. For the next thirty years it would not only inspire the design of the mechanisms by which political power is exercised, but also the moral justifications for their use.

Those New Zealanders born after 1984, New Zealand neoliberalism’s “Year Zero”, have absorbed the “free market” catechism practically without thinking.

Rogerpolitics does not believe that democracy is a market friendly form of government, and all Rogerpoliticians are expected to act accordingly.

New Zealand is a case study of a small country moving from strong isolationism to full fledged market liberalism. New Zealand policy makers concluded in the mid 1980s that isolationism was no longer a viable policy option. Instead, they turned their country into a laboratory of free trade and Chicago style Neoliberalism. Does this model have insights to offer to other small states?

Chris Trotter

“ROGERNOMICS” is political shorthand for the neoliberal economic policies introduced by Labour’s finance minister, Roger Douglas between 1984 and 1988. While most New Zealanders have heard of Rogernomics, nowhere near as many have heard of its inseparable companion, “Rogerpolitics”.

The term was coined by the New Zealand political scientist, Richard Mulgan, to describe the form of politics required to make sure that Rogernomics “took” in a country which, on the face of it, should have rejected neoliberalism out of hand. Had Rogerpolitics not been so successfully embedded in the key organs of the New Zealand state, then Rogernomics would not have lasted.

Critical to the success of Rogerpolitics was the widespread public disillusionment with the style of politics that preceded it. In New Zealand’s case, the principal target of the public’s hostility was the National Party Prime Minister, Rob Muldoon, and his highly interventionist economic policies – “Muldoonism”.

An additional factor in the public’s antipathy towards Muldoon was his facilitation of the extremely divisive Springbok Tour of 1981. In the eyes of younger New Zealanders, “The Tour” was proof of their elders’ unfitness to rule. The people referred to by the then prominent political journalist, Colin James, as the “RSA Generation” had, in the eyes of the “Vietnam Generation”, been confronted with a straightforward moral test, and they had failed.

Without Muldoon and Muldoonism; without the Springbok Tour; the hunger for a new way of managing the economy and running the country would not have been so acute. The proponents of neoliberalism, or “free market forces” (as the ideology was more commonly referred to thirty-five years ago) were pushing against an open door.

It was the same all over the advanced capitalist world. The interventionist economic policies that had played such a crucial role in generating the unparalleled prosperity of the post-war period had finally run up against the buffers of the capitalist system. Every attempt to reduce the rising levels of unemployment and inflation that were the primary manifestations of the system’s failure only ended up pushing them higher. Margaret Thatcher’s Conservative Party captured the growing sense of unease with its 1979 slogan: “Labour isn’t working.” The following year, in the USA, the Republican candidate for President, Ronald Reagan, summed-up the popular mood when he declared: “In this present crisis, government is not the solution to our problem, government IS the problem.”

In its essence, this is what Rogerpolitics is all about: getting government out of the way. If politicians, by interfering in the economy, only made things worse, then the obvious solution is simply to prevent them from interfering.

. . . Bowalley Road

A Model Strategy for Small States to Cope and Survive in a Globalised World Economy? An Analysis of the “New Zealand Way”.

Georg Menz, Department of Political Science, University of Pittsburgh

Can New Zealand indeed serve as a model for other small states?

1. Introduction

A major issue of concern to contemporary social scientists is the relative decline of the autonomy of the nation state. Traditionally, the nation state served as a useful unit of analysis for scholars in international political economy. It may no longer be a useful starting point. Advocates of the globalisation thesis argue that the nation state is losing much of its room for maneuver in public policy decision making. This is a result of trade liberalisation and deregulation, particularly of the financial sector; rapid technological advances in telecommunications and data processing, and the exponential growth of international trade and foreign direct investment (FDI).

As I will argue below, two opposite arguments about the impact of globalisation on small states might be put forward.

First, it would appear that small states are particularly affected by a loss of autonomy as a result of globalisation. Smaller states face a constrained choice of responses to the impact of the world economy on their own national markets. By virtue of their economic and political power, size and strength, smaller states dispose of a relatively smaller array of policy responses than larger states. They cannot hope to set the parameters of the global economy given their relatively small economies and limited political and military clout.

Small states are usually host to only a small number of transnational corporations and, owing to the size of their own domestic market, they are commonly not only dependent on exporting their own products, but also on importing raw materials from abroad.

Alternatively, the opposite argument might be made. Small states are particularly well prepared to deal with open markets because of their economic structure. For many European small states, a protectionist trade policy was never a viable option.

Katzenstein (1985), who is often credited for his pioneering work on “small states”, points out that these states, due to their dependence on both imports and exports, are committed to the cause of international free trade. Foreign trade typically makes up a large proportion of small state Gross Domestic Product (GDP). Small states also depend on occupying market niches with relatively highly developed technology in sections of the economy where they enjoy a comparative advantage in production or a technological lead over their competitors.

In this study, I seek to analyse how one small state has responded to the challenges of globalisation. Using New Zealand (NZ) as a case study, I will examine New Zealand’s remarkable reform process as one possible policy response to dealing with a globalised world economy. “Model New Zealand” has been heralded as a successful model of structural adjustment by international observers. Regardless of whether one accepts the normative component of this judgement, New Zealand presents a paradigmatic case of complete market liberalisation and the embrace of neoliberal doctrines.

Can New Zealand indeed serve as a model for other small states? I seek to critically examine the reform process and shed light on its intellectual sources, employing some of the insights generated by the constructivist approach in international relations. Can New Zealand be properly considered a success story from which other small states can learn? The country went from being one of the most regulated countries in the OECD to being one of the most deregulated.

I argue that it underwent a very painful period of transition and adjustment during the reforms. Even now the beneficial effects are far from obvious. Market liberalisation has come at a very high social cost. Poverty and social inequality are rising.

The economic data reveals an equally mixed picture. In 1995, commentators admired the “turn around economy” and observed that the initial hardship seemed to be finally paying off. After the devastating impact of the Asian crisis in New Zealand, this assessment seems questionable and premature. New Zealand has been able to successfully fill some market niches in cutting edge agricultural engineering. At the same time, however, extreme liberalisation also means strong dependency on foreign capital, as is especially true for New Zealand with its large current account deficit and high level of foreign direct investment. Dependency on highly volatile foreign capital can become problematic rather quickly, as New Zealand’s recession in the wake of the Asian crisis vividly demonstrates.

2. Small States and Globalisation

How should we conceptualise globalisation? And how is it affecting the policy choices of small states? The purpose of this section is to arive at a working definition of globalisation and to analyse its impact on small states.

Since academic discourse on this subject is of a relatively recent nature, it is perhaps unsurprising that no single coherent definition of the phenomenon has yet emerged. However, from the writings of those authors who are willing to acknowledge globalisation as a genuinely new phenomenon a common thread can be extracted. These authors argue that the nation state is losing its autonomy, or posit, as Susan Strange has done “the retreat of the state”. The state’s sphere of control is decreasing, as an array of new actors moves in to undermine the state’s formerly comfortable command of territorially based authoritys. Among those actors are international institutions, networks and, most importantly, private transnational and multinational corporations.

While the nation-state no longer seems able to command the same array of macroeconomic tools, obvious winners are international markets. Global financial flows of gigantic proportions play an important role in shaping and curtailing governments’ choices.

Following the wave of deregulation and market liberalisation, which commenced in the late 1970s, particularly in the financial sector, the state’s macroeconomic weaponry chest looks considerably less well-stocked today. No longer can a government simply rely on monetary policy to set its economy’s parameters: If it tries to increase the interest rate so as to curtail inflationary growth, this move will simply attract mobile foreign capital.

National fiscal policy is also affected by the increased mobility of global capital. Nation states cannot freely determine corporate tax levels, because what the market deems to be an excessive rate will only cause companies to invest in regions or state more amiable to their interests. Some analysts have gone as far as positing a global “race to the bottom” in which regions and indeed nations have to compete for corporate investment by lowering their environmental, safety, health and social standards and offering tax breaks and other incentives”. Regardless of state incentives, due to the decrease in strict regulation of the financial sector, global capital is much more uninhibited to move into and out of new locales at relative ease. Large volumes of money are on the move, “free to roam the globe looking for the brightest investment opportunities”.

There are two factors contributing to the relative ease with which large scale global financial flows are occurring today at an unprecedented rate.

Firstly, deregulation of the financial markets made short term foreign investment and portfolio investment much easier than before. Secondly, technological innovation, another important factor mentioned by Strange and Drachels, has meant that such transfers of financial capital can take place at an ever accelerating pace. Rapid advances in modern computer based technology allow for rapid and easy data processing and manipulation. The progress of telecommunications technology enables global dissemination of information at unprecedented levels of speed. In fact, I would argue that innovations in technology as such undermine the feasibility of the nation state’s regulatory capacity.

The dramatic increase in foreign direct investment (FDI) should also be mentioned, which is a relatively recent development as well. Investment of a given company abroad in means of production (factories, plants, refineries, etc.) is a phenomenon unparalleled in previous economic history and ought to be distinguished from colonial patterns of raw material extraction through subsidiary companies within colonies. Foreign direct investment in production facilities either seeks to elude protectionist measures by the host country or endeavours to exploit different levels of wages or social standards for production.

Thus, global trade is to some extent no longer the exchange of goods among companies from different nation states (taking advantage of Adam Smith’s comparative advantage in the production of goods), but instead has to be re-conceptualised as the intra company exchange of goods in various stages of the production cycle”.

Closely related to the issue of establishing a concisely specified definition of globalisation are questions of distinctiveness and uniqueness. Is the current degree of global economic interdependence and growth of trade dependency indeed a genuinely new phenomenon? Is there something that distinguishes the global exchange of money, goods and services today from exchange routes and networks in the age of Cecil Rhodes’ Imperialism, Marco Polo’s Asian expeditions, trans Saharan trade routes, or Roman trade with its neighbours? Perhaps so, some authors might concede, but they are less convinced that the level of current global interdependence and international trade is more than just a return to the pre 1914 levels of global interchange.

Different scholars emphasize different policy areas, which vary in the degree to which they are affected by a globalised world economy. Obviously, there are also different normative points of view arguing about whether or not globalisation is a phenomenon worthy of appraisal or condemnation, usually depending on the author’s political persuasion .

Based on this discussion, I propose to define and conceptualise globalisation in terms of the speed and regulatory ease of worldwide flow of capital. While it is important to consider the rapid growth of international trade in recent years as well, the latter component does not constitute a genuinely new phenomenon and therefore does not really deserve a new label.

At this juncture, it is important to distinguish between globalisation as defined above and internationalisation, that is, the increasing global interdependence based on growth of international trade.

How and in what way is globalisation affecting small states? While Katzenstein contributed significantly to research on small states, his work and that of others exploring small states in the literature dates back to the mid 1980s or earlier. At that point, the imminent pressures of globalisation had not yet received the same amount of scholarly attention as is true of today, since they were not as readily apparent.

As briefly alluded to in the beginning, two arguments could be advanced here.

Based on Katzenstein’s research, one might argue that small states are actually particularly well prepared for a world of deregulated financial and trade flow. Since they have always been dependent on the international market place for the raw materials they imported and the export of the manufactured goods they exported, they had to be able to navigate the treacherous tides of the international marketplace from very early on. In fact, because of their status they had no choice other than to open up their economy. At the same time, they found ways to specialise in niche products.

On the other hand, the argument could be made that small states are but pawns in a game they cannot control nor even manipulate. The globalised economy finds small states in a particularly vulnerable position.

If we accept the premise that nation state lose some of their ability to manipulate their macroeconomic parameters, this must apply with particular vengeance to small states. They are even more vulnerable to the consequences of the rapid inflow and outflow of foreign short term investment. If governments of large countries can no longer counteract the speculative movement of the markets, this must be an even more unsurpassable challenge for small states.

Companies from small states cannot enjoy the advantages of the economies of scale, which a large domestic market offers. Small states are typically host to only a small number of transnational companies (TNCs), which are in a position to take advantage of deregulated international trade and investment opportunities. Their economies are made up by small and medium sized businesses, which run the risk of being taken over or run off the road by large foreign TNCs. The best these small and medium sized businesses can hope for is to diversify their customer base by gaining new markets abroad. However, they will cenainly be hard pressed to find products they can effectively and competitively market abroad owing to their limited resource basis for international advertising, marketing, and distribution.

New Zealand is a case study of small country moving from strong isolationism to full fledged market liberalism. New Zealand policy makers concluded in the mid 1980s that isolationism was no longer a viable policy option. Instead, they turned their country into a laboratory of free trade and Chicago style neoliberalism. Does this model have insights to offer to other small states?

3. Introducing the ‘New Zealand Way’

In 1984, the small South Pacific island nation of New Zealand gained worldwide attention by implementing the most comprehensive economic reform program of any OECD country to date. Within only a few years, New Zealand experienced a paradigmatic shift from neo Keynesiasism to New Right monetarism. It went from being one of the most regulated countries in the OECD to being the most liberalised and deregulated. In fact, neo liberalism found a much more zealous disciple in New Zealand’s Labour Party than is true for any other New Right leader. New Zealand “out Thatchered Mrs. Thatcher”.

A small remote island nation, over a thousand miles from its nearest neighbour Australia, it had previously been known for pre-empting its European cousins with progressive policies such as female suffrage in 1893, a comprehensive welfare system and a fervent environmental and anti nuclear policy. Now New Zealand stood at the forefront once again. This time, though, it overtook Western Europe on the right. It made headlines for a radical move away from Keynesian economics and the welfare state. Perhaps surprisingly, it was a Labour government, which under the stewardship of Prime Minister Lange and Minister of Treasury Roger Douglas jump started a radical programme of deregulation, market liberalisation and privatisation of state owned enterprises.

The OECD, The Economist, and other like minded apostles of the neo liberal New Right outdid themselves in praises for the blitzkrieg style economic reform programme which radically redefined the role and scope of government in New Zealand within a few years.

The reform programme included the deregulation of the financial sector, the removal of subsidies to producers, both in the manufacturing and the agricultural sector; the removal of tariffs on imports, a fundamental tax reform, a comprehensive restructuring of the public sector, a radical cut in the generous system of welfare provisions, a total remodelling of labour relations, and the corporatisation and privatisation of formerly government owned enterprises. The following table provides an outline of the reform program enacted in New Zealand between 1984 and 1994.

As can be seen above, the liberalisation programme occurred in two major waves. Under Labour Party guidance, from 1984 to 1990. the first wave of reforms was implemented. As Minister of Finance Roger Douglas played such a pivotal role in the process, the label “Rogermomics” is often applied to the reforms. These included industry deregulation, trade reform and capital market reform. Startling to many voters and academic observers, the National Party continued the reform programme, after it took over power from Labour in 1990. The second wave of reforms entailed macroeconomic stabilisation, corporatisation of state owned enterprises (SOEs), privatisation of SOEs, a comprehensive labour reform, and a fundamental restructuring of the welfare state.

As can be seen, the reform programme bears a striking resemblance with structural adjustment programmes commonly recommended for Third World countries.

The first steps of deregulation affected the financial sector. and included the removal of exchange rates and a floating of the New Zealand dollar. The government committed itself to a monetarist anti inflationary regime, by means of sustaining high interest rates and exchange rates. Price stability was enshrined as the overarching goal in the Reserve Bank Act of 1989, leading to what can be described as the “Bundesbank-sation” of the institution. Labour drastically cut down subsidies, abolished import licences, and began to phase out tariffs. It also opened up the economy to foreign direct investment. In fiscal policy, personal income tax for top earners was reduced significantly and a goods and services tax was introduced.

Government activity and the public sector as a whole were fundamentally restructured. Government departments were re-organised along corporate lines. In many cases, this meant transformation into SOEs and subsequent privatisation, in most cases to Australian or American companies. This corporatisation included government research facilities, hospitals, public housing, and universities.

As part of the second wave, the labour market was liberalised and the welfare state underwent severe cutbacks in scope and size. This translated into a full blown attack on the structural power of unions with the abandonment of collective bargaining imbedded in the 1991 Employment Contracts Act. At the same time, welfare benefits and eligibility were drastically curtailed.

This “big bang” reform program marked a revolutionary departure from the past. New Zealand has a long history of heavy state interventionism and government regulation. Barry Gustafson notes that:

“Manufacturers and wage earners were protected by import controls, and farmers were encouraged to produce and were protected from fluctuations in overseas markets by subsidies, tax incentives, and producer boards, responsible for the coordination of marketing of products. The banking system and value of the currency were tightly controlled.”

In fact, some of the economic measures pursued by its government were commonly associated with the State Socialist countries of the former Warsaw Pact such as tight controls on the circulation of currency, high tariffs, import quotas, and a central government agency co ordinating export policy. Government intervention has traditionally been regarded as beneficial and a cautiously modernising force.

Due to almost unlimited access for its agricultural products to its former motherland Britain, “England’s Garden” prospered throughout the 1950s and 1960s, boasting the third highest standard of living in the 1950s. New Zealand was able to provide its citizens a generous set of cradle to grave welfare provisions, universal health care and free access to education. Until the mid 1970s, unemployment was virtually unheard of.

Wage levels were set so as to guarantee a living wage “for a man, his wife and three children”.

The National Party government provided generous agricultural subsidies and managed the worldwide marketing of New Zealand’s agricultural products. Meanwhile, domestic manufacturing was protected from competition from abroad through high tariff barriers. The government willingly underwrote New Zealand’s continuing current account deficit by accumulating foreign debt. As delightful as life at the other end of the planet seemed, some troubling structural problems were already evident, such as the excessive dependence on the export of commodities.

In the 1970s these problems were brought to light as the global economy experienced meagre growth and high inflation. New Zealand was hard hit, exhibiting one of the lowest growth rates of any country within the OECD during the 1960s and 70s. There were a number of external shocks which New Zealand faced.

Firstly, main customer Great Britain joined the European Community, thereby becoming part of the Common Market for agricultural products. Though exceptional provisions were made to buffer some of the shocks for the New Zealand economy, this meant a sudden loss of New Zealand’s main market.

Secondly, in the wake of the oil crises of 1973 and 1979, New Zealand’s terms of trade deteriorated dramatically. Not only did oil prices rise exponentially, demand for commodities slipped. This hurt New Zealand’s economy badly, since its exports were still largely composed of wool, meat and dairy products. Notwithstanding a temporary boom in commodity prices between 1971 and 74, terms of trade deteriorated further throughout the 1970s and early 1980s. New Zealand’s unsophisticated reliance on agricultural products and its failure to diversify its export basis in time was beginning to backfire.

Thirdly, and related to this, in the wake of global stagflation, the Europeans were not alone in their hesitance to accept agricultural imports. A worldwide shift towards more protectionism occurred in the agricultural sector. This development continued to bedevil the New Zealand economy and only gradually came to an end.

Robert Muldoon, Prime Minister and Finance Minister between 1975 and 1984, attempted to address the economy’s sour performance by pseudo Keynesian methods. As part of the so called “Think Big projects”, he led an ambitious campaign to reduce New Zealand’s dependence on foreign oil imports and increase the domestic heavy manufacturing industry such as the steel industry in Northland. His macroeconomic policy was unfortunately poorly designed and inconsistent.

Though Keynes had called for state intervention to stimulate demand, this did not imply gross misallocation of funds to poorly planned projects.

Muldoon’s short sighted and ill advised course maneuvered unsteadily between heavy state interventionism, including the 1982 wage and price freeze, and cautious flirts with reforms. Essentially, this misguided lingering highlighted his lack of any real vision.

In 1984, the country underwent a severe economic crisis. Muldoon and his National Party had failed to offer anything more sophisticated than a simple wage and price freeze, while clinging on to an overvalued New Zealand dollar. Foreign debt had accumulated to a level of 40 percent of Gross Domestic Product (GDP), well in excess of what crisis ridden countries such as Mexico and Argentina had taken. In this situation, the National Party called a snap election on 14 July. Labour scored an overwhelming victory.

4. Why did it happen and why in New Zealand? Analysing the intellectual sources

“Government bad! Market good!”

Notwithstanding the economic malaise the country faced in 1983 and 1984, the dogmatic zealousness with which economic reforms were implemented by Labour Minister of Finance Roger Douglas and his small group of cohorts in the Treasury Department presents somewhat of a puzzle to the outside observer.

How did a country known for its progressive policies, its welfare state and its anti nuclear and environmental policies so quickly and emphatically embrace the tenets of neoliberalism and the New Right?

The simplest answer is usually provided by the defenders of New Zealand’s neo liberal experience. They are quick to point out that New Zealand faced with tremendous economic structural problems and facing a severe crisis and government bankruptcy had little choice. A small country cannot continue down a path of isolationism, but must accept to navigate the tides and the ups and downs of the global market.

This is, of course, hardly a satisfactory answer. The country still had other policy options, such as moving towards a more neo corporatist direction, as in Western Europe, or a much more gradual and cautious reform programme such as that in Australia.

A more satisfactory answer can be provided if we follow some of the insights generated by the constructivist literature in international relations. Scholars in this tradition have questioned the static structure-agent relation embedded in the neo realist paradigm and posit a more dynamic interrelation between the two. Since our environment is socially constructed and interpreted, actors respond to their perception of the environment. Constructivist scholars emphasise the importance of what states make of their situation. In this process of forming one’s perception, it is of obvious importance what types of intellectual frameworks inform the actor and to what extent these parameters can be manipulated as a result of the inflow and acceptance of ideas. There is now a burgeoning body of literature on the influence of ideas on policy makers. Scholars basing their work on these premises emphasise the diffusion of ideas through network channels. The results of a “cognitive evolution“ might thus disseminate worldwide.

Especially interesting is the suggestion that while ideas might be out in the open, they have to find channels of access to policy makers and are then usually adapted to circumstances and institutional configuration of individual countries.

However, we should remind ourselves, that the influence of ideas on actual policy makers, particularly those originated by academics, has been pointed out quite some time ago.

Keynes himself asserted in 1936:

“Indeed the world is ruled by little else than ideas. Practical men, who believe themselves quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.“

In the case of New Zealand, it seems fairly evident that the type of ideas and intellectual constructs embraced by Douglas and his associates at Treasury were imported from abroad, seeing that they constituted a revolutionary break with New Zealand’s state interventionist and later Keynesian tradition. Since the ideas behind the reform programmes were so alien to the New Zealand context, how can we account for this policy turn? Where, then, did these ideas originate?

In this context, the two major documents released by Treasury following the 1984 elections, Economic Management, and the 1987 elections, Government Management are informative to study. Economic Management was prepared by Treasury in a mere six weeks and provided the outline for the economic policies for the following six years. The spirit and at times even the letter of these documents betray their heavy indebtedness to the ideology of the New Right.

Most centrally, the neoclassical ideology of the Chicago School, the Public Choice writings and Austrian economics left their heavy imprints on the guidelines which were to dominate the New Zealand reform process.

A thorough summary of these intellectual sources would be well beyond the scope of this paper. However, one can adequately summarise these intellectual sources by pointing out the common themes stressed by these writers, namely a fundamental distrust in the state and a reliance on the market for the efficient allocation of resources and the greater good.

Or, to put it into slightly more acerbic terms, just as George Orwell’s pigs had chanted “Four legs good! Two legs bad!’ , so Friedman, von Hayek, Buchanan and their cohorts were chanting “Government bad! Market good!”

While New Zealanders profited over the decades from a benevolent state interventionism, Friedrich von Hayek, epitomising the Austrian school, portrayed the state as an inevitably power maximising leviathan, eager to clutch its paws around individual citizen’s liberties. Thus, the state was virtually guaranteed to intervene into an ever increasing array of individual liberties, thereby perpetuating a journey down a “road to serfdom”. The market, on the other hand, provides innovation and allows for creative discovery.

Chicago School economist Milton Friedman also strongly criticised government’s tendency to curtail an individual’s liberty. He postulated a minimalist role for the state. Only the unregulated market would provide for the most efficient price setting, send out the “right” signals, and thereby foster and encourage the activities of the utility maximising individual. Consequently, Friedman rallied against the welfare state and against any state intervention beyond a closely circumscribed array of public goods.

The sum of actions of rational, utility maximising individuals, on the other hand, would provide benefits for evelyone as the economy would move towards an equilibrium.

This semi religious belief in the invisible hand of the market in efficiently allocating resources and a general distrust in government was complimented by some of the Public Choice theorists, also originating at the University of Chicago as well as Virginia. Public choice applies some of the basic tenets of economics to political activity, arguing that bureaucrats, far from being benevolent altruistic and high spirited individuals, working in the interest of the greater public good, are really just as pettily minded profit maximising as anybody else. Thus, they attempt to maximise their department’s budget, size and scope.

How did Chicago influence New Zealand? What were the channels of influence along which these ideas travelled? And what characteristics of the domestic structure, emphasised by constructivists like Risse Kappen, nourished the implementation of the reform programme?

In this context, it is important to recognise the importance of channels of intellectual exchange with the United States. A number of Treasury officials had received their graduate training in the United States. To some extent, this mirrored the development in Latin American countries, particularly Chile and Mexico, where students trained in the US (the “Chicago Boys” in the Chilean example), applied with almost religious zealot the theories they had been indoctrinated with to restructuring the domestic structures of their home countries.

Similarly, many NZ Treasury officials had spent time at academic institutions in the US or had previous experience at such free market bastions as the World Bank or the International Monetary Fund (IMF).

We should mention in passing that many New Zealanders began to develop a negative self image of their own country as a sleepy backwater prone to old fashioned ‘boring’ Keynesian state interventionism. They were fed up with Muldoon’s heavy handed and fairly authoritarian paternalism.

In addition, we can point to at least two other intellectual sources.

First, there is the IMF. Schwartz points out that New Zealand’s reform programme bears striking similarity to the recommendations of the IMF for structural adjustment. New Zealand removed its wage, price and interest controls. deregulated financial transactions and phased out subsidies for manufacturing and agriculture. As mentioned previously, some NZ Treasury officials had professional experience at the IMF.

Secondly, it is certainly no coincidence that New Zealand launched its reform programme a mere five years after a similarly minded individual had ascended to power at 10 Downing Street. The former colonial power Great Britain still exerted an intellectual hegemony over New Zealand. Thatcher exhibited distrust towards the state and its role in the economy, initiating an expansive programme of privatisation and an extensive restructuring of the public sector. She also significantly curtailed the role of unions.

Meanwhile, in the United States, supply side economics and market liberalisation also carried the day after the election of Ronald Reagan in 1980. Reagan’s policies included measures such as deregulation, prominently in the field of telecommunications and airlines, “rolling back the state”, cutting down welfare expenditures, and enacting tax cuts, particularly at the top end of the income scale.

Following the constructivist research agenda, the particular domestic structures of a host nation also ought to deserve attention in an analysis of the impact of ideas on a given polity. In the case of New Zealand there are indeed particularities, in fact peculiarities which fostered the swift and rapid enactment of a comprehensive package of economic reforms. Two central factors merit our attention here.

First, as part of its colonial heritage, New Zealand had up until 1993 a Westminster style “first past the post” system and only two major political parties. In fact, New Zealand constituted a more perfect example of the Westminster model than the British motherland. Thus, once Labour had got hold of power in 1984, it commanded a comfortable absolute majority of seats. Political opposition thus had practically no way of manipulating the course of events. The same applies for the situation of the National Party after 1990. Because of the amount of power the executive could wield in this system, no checks and balances were in place to act as a dam against the blitzkrieg style policy making approach of Mr Douglas. Thus he and his intellectual companion in the Treasury Department were able to quickly enact their programme.

There was no second chamber of parliament, no effective opposition and no presidential veto to impede the onslaught of reforms.

Secondly, Treasury played a central role in the reform processs. In fact, it “became the principal initiator” and formed a “consistent, cohesive, intellectually convicted group” as Prime Minister Lange later recalled. It was able to do so owing to its “near monopoly position with respect to economic policy advice” within the “unitary, centralized structure” of the political system in New Zealand.

Because the reforms constituted such a radical break with the intellectual tradition hitherto pursued we must look abroad for some of the intellectual sources of the New Zealand sources. In this context it is enlightening to accept the premise of the constructivist turn in international relations and consider how ideas and norms can influence policy makers. The Treasury documents outlining the economic reform programme bear the heavy imprint of the Chicago school, the Austrian school and to some extent the insights of Public Choice. Based on the premise of a distrust of the state and placing faith in the invisible hand of the market, these theories shared in common their advocacy of relying on an unregulated market and a minimised state.

They made their way to New Zealand by way of intellectual interchange with the United States. A feeling of disdain towards Muldoon’s heavy handed authoritarianism, commonly yet falsely associated with Keynesianism helped usher in a paradigmatic intellectual change in New Zealand and a shift towards the free market ideas of Chicago. Domestic structures, such as a Westminster style political system, ensuring an absolute majority for one party, and the strong influence, which Treasury could exert, both contributed to the implementation of these ides in to practice.

5. A Model Strategy? Analysing the implementation of the “New Zealand Way”

In 1984, economic crisis mandated immediate action. Defenders of the reform programme argued that there was little choice to a comprehensive restructuring in light of the apparent failures of Muldoon’s pseudo Keynesianism. In any case, in the early 1990s “Model New Zealand” was touted in the international press as a success story and not only by the OECD. A never ending stream of international journalists, academics, and politicians descended perennially upon Wellington to explore what it was that had turned this small South Pacific nation into a “job creation machine”.

Commonly, New Zealand’s relatively low unemployment rate was mentioned along with its economic growth rate as measured by GDP. In 1993, GDP grew by 4.8 per cent, by 6.1 per cent in 1994 and by 3.3 per cent in 1995. Employment grew by 2 per cent in 1993, 4.3 per cent in 1994, and 4.7 per cent in 1995. Meanwhile, unemployment declined from 9.5 per cent in 1993 to 8.2 per cent in 1994 and again to 6.3 per cent in 1995 (see also appendix).

Government was able to record a surplus in its budget balance, allowing it to enact a tax cut in 1997. The implication was, of course, that both developing countries and the advanced industrial countries could stand to learn a lesson or two from this powerhouse in the South Pacific. Slavish adoption of an IMF style structural adjustment programme seemed to have paid off for the Kiwis. An economy, which up until the 1980s had exhibited sluggish growth and still bore uncanny resemblance to a developing country owing to its heavy reliance on a large commodity sector, was now showing signs of remarkable growth.

Meanwhile, the advanced industrial countries of Europe were suffering no or slow growth while facing a pressing structural unemployment problem. There was considerable debate about liberalising the labour market and restructuring the public sector in order to be able to successfully compete in a global economy. New Zealand had enacted all these changes and seemed to be harvesting the fruits the reform programme bore. It had gone from being extremely regulated and protectionist to being the most ardent supporter of an unregulated market environment. New Zealand’s remarkable reform programme seemed to translate into impressive economic benefits. Thus, the country seemed well suited to serve as a model for coping with the challenges of globalisation.

However, a closer look reveals a much more mixed record. Upon closer inspection, it becomes evident rather quickly that the 1993-95 economic boom constituted little more than a temporary recovery from almost a decade of recession. Throughout the 1980s, the payoffs from the reforms appeared far from evident. New Zealand went through a drawn out period of extremely painful adjustments. On many indicators, such as employment, the economy is returned to pre 1984 levels only in the late 1990s. In the following section we shall examine the economic performance in more detail.

As I will point out, the country paid a very high price for its “success”. Both the social cost is chilling and the issue of loss of national autonomy is far from a purely academic concern for many Kiwis. Privatisation and economic liberalisation has meant that many economic decisions are no longer being made in Wellington, but in corporate headquarters in Australia, Britain and the US.

Due to its reliance on foreign capital both in the form of portfolio investment and FDI the country has made itself vulnerable to the whims of the international financial markets, as became painfully obvious during the Asian crisis. A genuine success is New Zealand’s cutting edge technology in the field of agricultural engineering. But overall, a sober analysis of the costs and benefits of the reform programme cannot lead to the sameenthusiastic conclusions of the international financial media.

Let us consider the economic side flrst. Throughout the 1980s, New Zealand’s macroeconomic indicators were anything but impressive. In fact, between 1985 and 1992 total growth across OECD economies averaged 20 percent, while New Zealand’s economy shrank by one percent. In both 1989 and 1991 GDP growth was negative. Between 1987 and 1991, the unemployment rate more than doubled from 4.1 to 10.7 percent, reaching unprecedented levels and exceeding the OECD small member countries’ average (see appendix 2 for further details). While labour productivity did begin to increase in 1986, this was mainly due to massive labour cutbacks and not even a consistent trend. In fact, between 1984 and 1993 productivity growth averaged only 0.9 percent.

While Muldoon’s practice of heavy borrowing from overseas was severely criticised, Labour actually continued this practice without passing down the benefits to NZ citizens. Both total public debt and public overseas debt continued to increase, the former reaching a record 80 per cent of GDP in 1987. Inflation continued to vex the economy until 1993, averaging 9 per cent.

In the short to medium term the reforms brought about the worst recession in New Zealand since the 1930s. The “reinvention” of government and the public sector translated into a massive rise of unemployment. A country in which unemployment was virtually unheard of now saw workers laid off by the thousands. Unemployment peaked up to record levels.

Yet after eight painful years of transition, the reforms finally seemed to pay off. In December 1991, inflation dropped to below two per cent. In 1993, the balance of payment deficit moved below two per cent of GDP and the government budget showed a surplus for the first time in fiscal year 1993/94. Real GDP began to grow again in 1992 and unemployment began to sink in 1994-95. However, unemployment was still well above pre 1984 levels and so was public debt. According to the OECD, real GDP in 1992 was still 5 per cent below the 1985-86 level. The GDP growth in 1993 seemed to have brought NZ merely back into a general trend of worldwide economic recovery.

In the meantime, New Zealand had become a dramatically different society. Before analysing the more recent development and the impact of the Asian crisis, it is worth shedding some light on the social costs of “Model New Zealand”.

New Zealand has always been proud of its social cohesion. A quasi social democratic commitment to social equality, equal wages and a welfare state had meant a stable, peaceful and socially cohesive society.

Now, as the commitment to “sleepy backward” Keynesianism went flying out of the window, so too, did the commitment to social equality. The income gap rose and as unemployment grew, so did social inequality. Despite a slight increase in productivity, real wages by 1999 had slightly decreased since 1985/86.

A lot of the growth in employment can actually be traced back to the growth of part time jobs which doubled from 200,000 to 400,000 between 1984 and 1995, while the number of full time positions decreased. These part time positions typically do not entail the same amount of benefits as full time jobs.

Following the first wave of corporatisation and privatisation, which lead to massive growth in unemployment, the National party, adding insult to injury, enacted a combined programme of welfare cuts and labour market deregulation in 1990/91.

Subsequently, poverty increased markedly. By 1991, 17.8 per cent of all New Zealanders lived below the poverty line, while the median income had declined by 19.2 per cent between 1982 and 1991.

Perhaps unsurprisingly, crime rates rocketed, violent crime increasing by 50 percent between 1982 and 1991, endowing New Zealand with the dubious distinction of having the third highest violent crime rate in the world.

New Zealand today has the highest youth suicide rate in the western world. For a country which is trying to portray itself as one of the few success stories in creating a bicultural society, Aotearoa New Zealand, the disproportionate rise in poverty and unemployment among its Maori and Pacific Island population presents at the very least a severe embarrassment.

Of serious concern is the emergence a two tier social stratification of society, which parallels racial lines and mirrors the unfortunate American experience. Symptoms of this development are the growth of urban ghettos in South Auckland and the growth of criminal youth gangs among Maori and Pacific Island youths.

Following the cuts in the welfare system enacted by National in 1990, real poverty emerged in New Zealand to a degree previously unprecedented. There was a rapid growth in the number of people reliant on soup kitchens and private welfare organisations. Furthermore, corporatisation and privatisation of the Housing Corporation has obliged this former component of the welfare state to raise profits. A logical result has been the steady increase in rents and sales of a number of flats. This policy accepted the eviction of the most needy, precisely those for whose purpose the system was created. This lead to the emergence of homelessness for the first time in the history of the country.

At the same time, the corporatisation of higher education has meant the introduction of steep fees for tertiary education. Government drastically cut its spending on the education sector. While New Zealand students previously were obliged to a nominal fee of approximately NZ$100 per academic year, rates increased to between NZ$3000 and NZ$20,000 by 1999. Student loans are available, but at market level interest rates only. At the same time, student allowances were cut both in size and scope. This has contributed further to social stratification and inequality. Meanwhile, the policy of privatisation and corporatisation was extended to cover the health sector with the better off being offered the option of buying into private health insurance schemes. Meanwhile. the quality and scope of public health provision is deteriorating.

In the medium to long term, the radical privatisation programme and liberalisation of the economy has made New Zealand extremely dependent on volatile international financial markets. Such dependency became readily apparent during the Asian crisis.

As speculators withdrew their money from the overvalued Asian currencies they did not stop and discriminate, thereby excluding New Zealand. The Asian flu rapidly spread to the country, plunging it into recession and causing a fall of the NZ dollar to below 50 US cents for the first time in eleven years. New Zealand’s Top40 share index followed the dramatic decline of its Asian cousins in late 1997 and again in June 1998. In a sense this was not surprising. seeing that New Zealand suffered from similar problems as Thailand did, namely a large current account deficit, caused by the large inflow of foreign capital. While superficially speaking, the situation might be seen as different from Thailand because a large proportion of the deficit was due to large sale FDI, foreign investors in East Asia had thought exactly that to be true of countries there.

It is clear that the negative impact of the Asian crisis also had to do with the extent to which Asian countries, such as Japan and Korea, had begun to replace Britain and Europe as main outlets for New Zealand products. Owing to the persistence of trade barriers to agricultural sectors, New Zealand farmers were glad to find customers in resource poor commodity importers such as Hong Kong, Singapore and Taiwan. The rise of the New Zealand dollar versus the currencies of most of its Asian trade partners inevitably made its products more expensive and thus less attractive. This also translated into losses in revenues from the tourism sector. Furthermore, since Australia toik 20.3 percent of NZ exports, some indirect effects also came to play a role.

The exposure of New Zealand’s economy to the international financial markets is so high because of a perpetual current account deficit. The external deficit to GDP ratio hovers between 6 and 7 percent, while the foreign liabilities amounted to 80 percent of GDP in 1998. This level of foreign debt was a record high for any OECD country. It makes New Zealand dependent on the volatility of the market. To some degree, this is a result of the policy of the private sector to accrue high levels of foreign debt, in order to finance investment so as to stay internationally competitive. Another large causal factor of the problem of a current account deficit is New Zealand’s radical privatisation programme, enticing overseas investors to invest in a country with a very business friendly environment and causing profits to be repatriated. The stock of foreign direct investment more than tripled between 1989 and 1994, now making up one quarter of the GDP. Whether this level of foreign direct investment can be sustained over a long term period now that key assets of the New Zealand economy have been sold off into private hands is, however, far from certain.

Regardless of whether or not one accepts the neoliberal premise that privatisation of public enterprises results in overall efficiency gains for the economy, for a small country such policy raises the non-trivial concern over real loss of sovereignty. Foreign control over New Zealand is anything but a purely academic subject. In 1995, foreign investors owned half the stock market, 40 per cent of government bonds, while foreign ownership of companies amounted to 33.6 NZ$ billion as compared to government assets of 30 NZ$ billion. Around 90 percent of the banking sector is foreign owned, primarily by Australian companies.

US, British and Australian companies profited from the wave of privatisations, buying up companies at relatively low prices, though NZ taxpayers’ money helped create the bulk of the infrastructure of these companies in the first place.

Major examples of privatisation include the sale of Telecom, Air New Zealand, Bank of New Zealand, New Zealand Rail, and the cutting rights for the states’ forests. At the same time, Asian investors bought up large shares of NZ real estate, both commercial property and forestry land. These developments led one NZ politician to comment that “we risk being transformed into sharecroppers on our land”.

With telecommunication, transportation, the financial sector, the energy sector and increasingly the natural resource base and urban real estate being turned over to foreign owners, constraints on the array of policy measures a NZ government can undertake are quite severe. In a small country, privatisation programmes run the risk of attracting predominantly foreign investors due to the small domestic capital basis. As the case of New Zealand demonstrates this can leave the “independence as a nation substantially undermined”, with decisions affecting the economic and political life of the polity being made in boardrooms in New York, London and Sydney and no longer in Wellington.

This also implies that for the sake of marginally reducing its debt levels, the NZ government has terminally abandoned its control levers over a large section of the economy, now no longer controlled by a democratically elected government, but rather by purely profit oriented private businesses. It has also given away valuable sources of revenue which are now used to maximise private sector profits. These profits, in turn, are being quickly repatriated to overseas locales. For a small country, following the ‘New Zealand Way’ there is a very real danger of turning into a banana republic.

However, while large scale enterprises where sold off to foreign buyers, New Zealand has been fairly successful in developing cutting edge products in a number of agriculture related technologies, thereby occupying specialised market niches. Companies specialise in high tech agricultural products and services, particularly geared towards the dairy and sheep farm industries. These range from technical equipment for livestock feeding to livestock genetics services. Companies have the advantage of profiting from high quality research and development conducted at the Department of Technology at Waikato University in Hamilton and the Department of Agricultural Engineering at Massey University in Palmerston North. High quality research in agricultural sciences is also being carried out on the South Island at the Animal Division and Food Sciences Department at Lincoln University in Christchurch. There are early signs of the development of a “cluster economy” in Hamilton where the university promotes the co operation with the regional Crown Research Institute (CRI) and the emergence of spin off companies commercialising in some of the fruits of the research activity. These are encouraging signs and indicators of New Zealand taking advantage of its experience, expertise, and technical know how to develop unique globally competitive leading products.

This is an indication of acknowledging and profiting from niche markets which other, larger countries are either unaware of or incapable of penetrating. However, we might voice some concern about the fact that these products are still related to agriculture. Thus, the economy’s reliance on this sector is sustained.

6. Conclusion: A Mixed Picture

New Zealand has launched an ambitious and comprehensive series of reforms, commencing in 1984. The country chose to respond to the challenges implied by a globalising world economy in a fairly radical fashion, moving from being one of the most regulated economies in the OECD to the opposite extreme.

This paper has analysed the New Zealand reform programme in a quest to explore its feasibility as a model for other small states in coping with the pressures of globalisation. It is commonly argued that increasing interdependence, exponentially growing trade flows and expanding foreign direct investment are undermining the nation state’s level of autonomy. More precisely, the nation state loses its capability to manipulate key macroeconomic tools and thereby effectively to control key parameters of public policy making. As my analysis has shown, the ‘New Zealand way’ presents a mixed track record. The fairly limited successes of the much heralded “Model New Zealand” have come at a significant cost. Unemployment, poverty, and social inequality all stand at unprecedented levels today in New Zealand. While some macroeconomic indicators have been stabilised, the short to medium term impact of the reforms has been devastating. The short term recovery of the mid 1990s faded in the wake of the Asian crisis.

New Zealand’s high level of foreign debt combined with an extraordinary level of foreign direct investment means that the country is highly exposed to the whims of the international financial market.

Owing to large scale privatisations, initiated in the mid 1980s as a measure to reduce foreign debt and in line with the neoliberal antistatist dogma, substantial sections of the New Zealand economy are now controlled by Australian, American and British companies. This leads to the repatriation of profits from NZ operations and a huge current account deficit. It also means that the NZ government has voluntarily abandoned its capability of controlling large sectors of the economy and has given away revenue generating resources.

The NZ government thus finds the range and effectiveness of its public policy options severely curtailed, not least due to the Fiscal Responsibility Act, the Public Finance Act and the Reserve Bank Act, all of which constrain the role of government in the economy.

It will be interesting to follow the further developments of the New Zealand economy. A current assessment of the reforms, however, cannot lead to an endorsement of any such package of measures for other small states. The costs are quite considerable, while the benefits of a policy of effective capitulation to the market seem fairly limited.

Journalists, policy makers, and academics will probably continue to flock to Wellington to study this most ambitious of all public sector reform programmes.

Yet a comprehensive candid assessment about the overall results of this programme leads to the conclusion that New Zealand in liberalising its economy has overdone it.

Download this report (pdf)

The New Zealand Way. European Consortium for Political Research

The 1930s were humanity’s darkest, bloodiest hour. Are you paying attention? – Jonathan Freedland. 

Even to mention the 1930s is to evoke the period when human civilisation entered its darkest, bloodiest chapter. No case needs to be argued; just to name the decade is enough. It is a byword for mass poverty, violent extremism and the gathering storm of world war. “The 1930s” is not so much a label for a period of time than it is rhetorical shorthand – a two-word warning from history.

Witness the impact of an otherwise boilerplate broadcast by the Prince of Wales last December that made headlines. “Prince Charles warns of return to the ‘dark days of the 1930s’ in Thought for the Day message.” Or consider the reflex response to reports that Donald Trump was to maintain his own private security force even once he had reached the White House. The Nobel prize-winning economist Paul Krugman’s tweet was typical: “That 1930s show returns.”

Because that decade was scarred by multiple evils, the phrase can be used to conjure up serial spectres. It has an international meaning, with a vocabulary that centres on Hitler and Nazism and the failure to resist them: from brownshirts and Goebbels to appeasement, Munich and Chamberlain. And it has a domestic meaning, with a lexicon and imagery that refers to the Great Depression: the dust bowl, soup kitchens, the dole queue and Jarrow. It was this second association that gave such power to a statement from the usually dry Office for Budget Responsibility, following then-chancellor George Osborne’s autumn statement in 2014. The OBR warned that public spending would be at its lowest level since the 1930s; the political damage was enormous and instant.

In recent months, the 1930s have been invoked more than ever, not to describe some faraway menace but to warn of shifts under way in both Europe and the United States. The surge of populist, nationalist movements in Europe, and their apparent counterpart in the US, has stirred unhappy memories and has, perhaps inevitably, had commentators and others reaching for the historical yardstick to see if today measures up to 80 years ago.

Why is it the 1930s to which we return, again and again? For some sceptics, the answer is obvious: it’s the only history anybody knows. According to this jaundiced view of the British school curriculum, Hitler and Nazis long ago displaced Tudors and Stuarts as the core, compulsory subjects of the past. When we fumble in the dark for a historical precedent, our hands keep reaching for the 30s because they at least come with a little light.

The more generous explanation centres on the fact that that period, taken together with the first half of the 1940s, represents a kind of nadir in human affairs. The Depression was, as Larry Elliott wrote last week, “the biggest setback to the global economy since the dawn of the modern industrial age”, leaving 34 million Americans with no income. The hyperinflation experienced in Germany – when a thief would steal a laundry-basket full of cash, chucking away the money in order to keep the more valuable basket – is the stuff of legend. And the Depression paved the way for history’s bloodiest conflict, the second world war which left, by some estimates, a mind-numbing 60 million people dead. At its centre was the Holocaust, the industrialised slaughter of 6 million Jews by the Nazis: an attempt at the annihilation of an entire people.

In these multiple ways, then, the 1930s function as a historical rock bottom, a demonstration of how low humanity can descend. The decade’s illustrative power as a moral ultimate accounts for why it is deployed so fervently and so often.

Less abstractly, if we keep returning to that period, it’s partly because it can justifiably claim to be the foundation stone of our modern world. The international and economic architecture that still stands today – even if it currently looks shaky and threatened – was built in reaction to the havoc wreaked in the 30s and immediately afterwards. The United Nations, the European Union, the International Monetary Fund, Bretton Woods: these were all born of a resolve not to repeat the mistakes of the 30s, whether those mistakes be rampant nationalism or beggar-my-neighbour protectionism. The world of 2017 is shaped by the trauma of the 1930s.

The international and economic architecture that still stands today was built in reaction to the havoc of the 1930s

One telling, human illustration came in recent global polling for the Journal of Democracy, which showed an alarming decline in the number of people who believed it was “essential” to live in a democracy. From Sweden to the US, from Britain to Australia, only one in four of those born in the 1980s regarded democracy as essential. Among those born in the 1930s, the figure was at or above 75%. Put another way, those who were born into the hurricane have no desire to feel its wrath again.

Most of these dynamics are long established, but now there is another element at work. As the 30s move from living memory into history, as the hurricane moves further away, so what had once seemed solid and fixed – specifically, the view that that was an era of great suffering and pain, whose enduring value is as an eternal warning – becomes contested, even upended.

Witness the remarks of Steve Bannon, chief strategist in Donald Trump’s White House and the former chairman of the far-right Breitbart website. In an interview with the Hollywood Reporter, Bannon promised that the Trump era would be “as exciting as the 1930s”. (In the same interview, he said “Darkness is good” – citing Satan, Darth Vader and Dick Cheney as examples.)

“Exciting” is not how the 1930s are usually remembered, but Bannon did not choose his words by accident. He is widely credited with the authorship of Trump’s inaugural address, which twice used the slogan “America first”. That phrase has long been off-limits in US discourse, because it was the name of the movement – packed with nativists and antisemites, and personified by the celebrity aviator Charles Lindbergh – that sought to keep the US out of the war against Nazi Germany and to make an accommodation with Hitler. Bannon, who considers himself a student of history, will be fully aware of that 1930s association – but embraced it anyway.

That makes him an outlier in the US, but one with powerful allies beyond America’s shores. Timothy Snyder, professor of history at Yale and the author of On Tyranny: Twenty Lessons from the Twentieth Century, notes that European nationalists are also keen to overturn the previously consensual view of the 30s as a period of shame, never to be repeated. Snyder mentions Hungary’s prime minister, Viktor Orban, who avowedly seeks the creation of an “illiberal” state, and who, says Snyder, “looks fondly on that period as one of healthy national consciousness”.

The more arresting example is, perhaps inevitably, Vladimir Putin. Snyder notes Putin’s energetic rehabilitation of Ivan Ilyin, a philosopher of Russian fascism influential eight decades ago. Putin has exhumed Ilyin both metaphorically and literally, digging up and moving his remains from Switzerland to Russia.

Among other things, Ilyin wrote that individuality was evil; that the “variety of human beings” represented a failure of God to complete creation; that what mattered was not individual people but the “living totality” of the nation; that Hitler and Mussolini were exemplary leaders who were saving Europe by dissolving democracy; and that fascist holy Russia ought to be governed by a “national dictator”. Ilyin spent the 30s exiled from the Soviet Union, but Putin has brought him back, quoting him in his speeches and laying flowers on his grave.

European nationalists are keen to overturn the view of the 1930s as a period of shame, never to be repeated.

Still, Putin, Orbán and Bannon apart, when most people compare the current situation to that of the 1930s, they don’t mean it as a compliment. And the parallel has felt irresistible, so that when Trump first imposed his travel ban, for example, the instant comparison was with the door being closed to refugees from Nazi Germany in the 30s. (Theresa May was on the receiving end of the same comparison when she quietly closed off the Dubs route to child refugees from Syria.)

When Trump attacked the media as purveyors of “fake news”, the ready parallel was Hitler’s slamming of the newspapers as the Lügenpresse, the lying press (a term used by today’s German far right). When the Daily Mail branded a panel of high court judges “enemies of the people”, for their ruling that parliament needed to be consulted on Brexit, those who were outraged by the phrase turned to their collected works of European history, looking for the chapters on the 1930s.

The Great Depression

So the reflex is well-honed. But is it sound? Does any comparison of today and the 1930s hold up?

The starting point is surely economic, not least because the one thing everyone knows about the 30s – and which is common to both the US and European experiences of that decade – is the Great Depression. The current convulsions can be traced back to the crash of 2008, but the impact of that event and the shock that defined the 30s are not an even match. When discussing our own time, Krugman speaks instead of the Great Recession: a huge and shaping event, but one whose impact – measured, for example, in terms of mass unemployment – is not on the same scale. US joblessness reached 25% in the 1930s; even in the depths of 2009 it never broke the 10% barrier.

The political sphere reveals another mismatch between then and now. The 30s were characterised by ultra-nationalist and fascist movements seizing power in leading nations: Germany, Italy and Spain most obviously. The world is waiting nervously for the result of France’s presidential election in May: victory for Marine Le Pen would be seized on as the clearest proof yet that the spirit of the 30s is resurgent.

There is similar apprehension that Geert Wilders, who speaks of ridding the country of ‘Moroccan scum”, has led the polls ahead of Holland’s general election on Wednesday. And plenty of liberals will be perfectly content for the Christian Democrat Angela Merkel to prevail over her Social Democratic rival, Martin Schulz, just so long as the far-right Alternative Fur Deutschland makes no ground. Still, so far and as things stand, in Europe only Hungary and Poland have governments that seem doctrinally akin to those that flourished in the 30s.

That leaves the US, which dodged the bullet of fascistic rule in the 30s – although at times the success of the America First movement which at its peak could count on more than 800,000 paid-up members, suggested such an outcome was far from impossible. (Hence the intended irony in the title of Sinclair Lewis’s 1935 novel, It Can’t Happen Here.)

Donald Trump has certainly had Americans reaching for their history textbooks, fearful that his admiration for strongmen, his contempt for restraints on executive authority, and his demonisation of minorities and foreigners means he marches in step with the demagogues of the 30s.

But even those most anxious about Trump still focus on the form the new presidency could take rather than the one it is already taking. David From, a speechwriter to George W. Bush, wrote a much-noticed essay for the Atlantic titled, “How to build an autocracy”. It was billed as setting out “the playbook Donald Trump could use to set the country down a path towards illiberalism”. He was not arguing that Trump had already embarked on that route, just that he could (so long as the media came to heel and the public grew weary and worn down, shrugging in the face of obvious lies and persuaded that greater security was worth the price of lost freedoms).

Similarly, Trump has unloaded rhetorically on the free press – castigating them, Mail-style, as “enemies of the people” – but he has not closed down any newspapers. He meted out the same treatment via Twitter to a court that blocked his travel ban, rounding on the “so-called judge” – but he did eventually succumb to the courts’ verdict and withdrew his original executive order. He did not have the dissenting judges sacked or imprisoned; he has not moved to register or intern every Muslim citizen in the US; he has not suggested they wear identifying symbols.

These are crumbs of comfort; they are not intended to minimise the real danger Trump represents to the fundamental norms that underpin liberal democracy. Rather, the point is that we have not reached the 1930s yet. Those sounding the alarm are suggesting only that we may be travelling in that direction – which is bad enough.

Two further contrasts between now and the 1930s, one from each end of the sociological spectrum, are instructive. First, and particularly relevant to the US, is to ask: who is on the streets? In the 30s, much of the conflict was played out at ground level, with marchers and quasi-military forces duelling for control. The clashes of the Brownshirts with communists and socialists played a crucial part in the rise of the Nazis. (A turning point in the defeat of Oswald Mosley, Britain’s own little Hitler, came with his humbling in London’s East End, at the 1936 battle of Cable Street.)

But those taking to the streets today – so far – have tended to be opponents of the lurch towards extreme nationalism. In the US, anti-Trump movements – styling themselves, in a conscious nod to the 1930s, as “the resistance” – have filled city squares and plazas. The Women’s March led the way on the first day of the Trump presidency; then those protesters and others flocked to airports in huge numbers a week later, to obstruct the refugee ban. Those demonstrations have continued, and they supply an important contrast with 80 years ago. Back then, it was the fascists who were out first – and in force.

Snyder notes another key difference. “In the 1930s, all the stylish people were fascists: the film critics, the poets and so on.” He is speaking chiefly about Germany and Italy, and doubtless exaggerates to make his point, but he is right that today “most cultural figures tend to be against”. There are exceptions – Le Pen has her celebrity admirers, but Snyder speaks accurately when he says that now, in contrast with the 30s, there are “few who see fascism as a creative cultural force”.

Fear and loathing

So much for where the lines between then and now diverge. Where do they run in parallel?

The exercise is made complicated by the fact that ultra-nationalists are, so far, largely out of power where they ruled in the 30s – namely, Europe – and in power in the place where they were shut out in that decade, namely the US. It means that Trump has to be compared either to US movements that were strong but ultimately defeated, such as the America First Committee, or to those US figures who never governed on the national stage.

In that category stands Huey Long, the Louisiana strongman, who ruled that state as a personal fiefdom (and who was widely seen as the inspiration for the White House dictator at the heart of the Lewis novel).

“He was immensely popular,” says Tony Badger, former professor of American history at the University of Cambridge. Long would engage in the personal abuse of his opponents, often deploying colourful language aimed at mocking their physical characteristics. The judges were a frequent Long target, to the extent that he hounded one out of office – with fateful consequences.

Long went over the heads of the hated press, communicating directly with the voters via a medium he could control completely. In Trump’s day, that is Twitter, but for Long it was the establishment of his own newspaper, the Louisiana Progress (later the American Progress) – which Long had delivered via the state’s highway patrol and which he commanded be printed on rough paper, so that, says Badger, “his constituents could use it in the toilet”.

All this was tolerated by Long’s devotees because they lapped up his message of economic populism, captured by the slogan: “Share Our Wealth”. Tellingly, that resonated not with the very poorest – who tended to vote for Roosevelt, just as those earning below $50,000 voted for Hillary Clinton in 2016 – but with “the men who had jobs or had just lost them, whose wages had eroded and who felt they had lost out and been left behind”. That description of Badger’s could apply just as well to the demographic that today sees Trump as its champion.

Long never made it to the White House. In 1935, one month after announcing his bid for the presidency, he was assassinated, shot by the son-in-law of the judge Long had sought to remove from the bench. It’s a useful reminder that, no matter how hate-filled and divided we consider US politics now, the 30s were full of their own fear and loathing.

“I welcome their hatred,” Roosevelt would say of his opponents on the right. Nativist xenophobia was intense, even if most immigration had come to a halt with legislation passed in the previous decade. Catholics from eastern Europe were the target of much of that suspicion, while Lindbergh and the America Firsters played on enduring antisemitism.

This, remember, was in the midst of the Great Depression, when one in four US workers was out of a job. And surely this is the crucial distinction between then and now, between the Long phenomenon and Trump. As Badger summarises: “There was a real crisis then, whereas Trump’s is manufactured.”

And yet, scholars of the period are still hearing the insistent beep of their early warning systems. An immediate point of connection is globalisation, which is less novel than we might think. For Snyder, the 30s marked the collapse of the first globalisation, defined as an era in which a nation’s wealth becomes ever more dependent on exports. That pattern had been growing steadily more entrenched since the 1870s (just as the second globalisation took wing in the 1970s). Then, as now, it had spawned a corresponding ideology – a faith in liberal free trade as a global panacea – with, perhaps, the English philosopher Herbert Spencer in the role of the End of History essayist Francis Fukuyama. By the 1930s, and thanks to the Depression, that faith in globalisation’s ability to spread the wealth evenly had shattered. This time around, disillusionment has come a decade or so ahead of schedule.

The second loud alarm is clearly heard in the hostility to those deemed outsiders. Of course, the designated alien changes from generation to generation, but the impulse is the same: to see the family next door not as neighbours but as agents of some heinous worldwide scheme, designed to deprive you of peace, prosperity or what is rightfully yours. In 30s Europe, that was Jews. In 30s America, it was eastern Europeans and Jews. In today’s Europe, it’s Muslims. In America, it’s Muslims and Mexicans (with a nod from the so-called alt-right towards Jews). Then and now, the pattern is the same: an attempt to refashion the pain inflicted by globalisation and its discontents as the wilful act of a hated group of individuals. No need to grasp difficult, abstract questions of economic policy. We just need to banish that lot, over there.

The third warning sign, and it’s a necessary companion of the second, is a growing impatience with the rule of law and with democracy. “In the 1930s, many, perhaps even most, educated people had reached the conclusion that democracy was a spent force,” says Snyder. There were plenty of socialist intellectuals ready to profess their admiration for the efficiency of Soviet industrialisation under Stalin, just as rightwing thinkers were impressed by Hitler’s capacity for state action. In our own time, that generational plunge in the numbers regarding democracy as “essential” suggests a troubling echo.

Today’s European nationalists exhibit a similar impatience, especially with the rule of law: think of the Brexiters’ insistence that nothing can be allowed to impede “the will of the people”. As for Trump, it’s striking how very rarely he mentions democracy, still less praises it. “I alone can fix it” is his doctrine – the creed of the autocrat.

The geopolitical equivalent is a departure from, or even contempt for, the international rules-based system that has held since 1945 – in which trade, borders and the seas are loosely and imperfectly policed by multilateral institutions such as the UN, the EU and the World Trade Organisation. Admittedly, the international system was weaker to start with in the 30s, but it lay in pieces by the decade’s end: both Hitler and Stalin decided that the global rules no longer applied to them, that they could break them with impunity and get on with the business of empire-building.

If there’s a common thread linking 21st-century European nationalists to each other and to Trump, it is a similar, shared contempt for the structures that have bound together, and restrained, the principal world powers since the last war. Naturally, Le Pen and Wilders want to follow the Brexit lead and leave, or else break up, the EU. And, no less naturally, Trump supports them – as well as regarding Nato as “obsolete” and the UN as an encumbrance to US power (even if his subordinates rush to foreign capitals to say the opposite).

For historians of the period, the 1930s are always worthy of study because the decade proves that systems – including democratic republics – which had seemed solid and robust can collapse. That fate is possible, even in advanced, sophisticated societies. The warning never gets old.

But when we contemplate our forebears from eight decades ago, we should recall one crucial advantage we have over them. We have what they lacked. We have the memory of the 1930s. We can learn the period’s lessons and avoid its mistakes. Of course, cheap comparisons coarsen our collective conversation. But having a keen ear tuned to the echoes of a past that brought such horror? That is not just our right. It is surely our duty.

The Guardian

Globalisation once made the world go around. Is it about to grind to a halt? – Larry Elliott. 

His speech was like one normally expected of an American president. Countries must resist the temptation to retreat into harbour, the world leader said to a packed and admiring audience, but instead have the courage to swim in the vast ocean of the global market.

This was the kind of paean to free trade that might have come from John F Kennedy, George W Bush or Bill Clinton – all occupants of the White House who saw it as the United States’s role to defend the open international trading system set up at the end of the second world war.

This, though, was China’s President, Xi Jinping, in Davos last week, making it clear that he was prepared to fill the vacuum if Donald Trump went ahead with the sort of protectionist policies he had proposed in his election campaign.

Those attending Davos reassured themselves that Trump would ditch all these proposals once he was in office. But if he doesn’t, the consequences are obvious: the world will be plunged into a trade war that will bring the globalisation of the past quarter of a century to a juddering halt.

The Guardian

Brexit Britain turns against globalisation and modern technology, blaming it for low UK wages and inequality – The Independent. 

Post-Brexit Britain is in the throes of a major backlash against globalisation, blaming dwindling wages and rife inequality on the opening of the world’s economy, an exclusive poll for The Independent has revealed.

The survey by ComRes even exposes a new backward-looking dislike of modern technology in the UK, with the public blaming advances for a widening gap between the rich and poor.

People believe the gap has also been widened by the low interest rates employed by governments in many countries now suffering resurgent populist movements.

The Independent

No Time for Trade Fundamentalism.

“There is great danger that the system will break down … or that it will collapse in a grim replay of the 1930s.” by Dani Rodrik

Not so long ago, it would have been unimaginable to contemplate a British exit from the European Union, or a Republican presidential candidate in the United States promising to renege on trade agreements, build a wall against Mexican immigrants, and punish companies that move offshore. The nation-state seems intent on reasserting itself. Project Syndicate 

Basing globalization on defensible democratic principles is its best defense. – Dani Rodrik

We need to rescue globalization not just from populists, but also from its cheerleaders. Simply put, we have pushed economic globalization too far, toward an impractical version that we might call “hyperglobalization”. Some simple principles would reorient us in the right direction.

1. There is no single way to prosperity. Countries make their own choices about the institutions that suit them best.

2. Countries have the right to protect their institutional arrangements and safeguard the integrity of their regulations. Financial regulations or labor protections can be circumvented and undermined by moving operations to foreign countries. Countries should be able to prevent such “regulatory arbitrage” by placing restrictions on cross-border transactions. For example, imports from countries that are gross violators of labor rights may face restrictions when those imports demonstrably threaten to damage labor standards at home.

3. The purpose of international economic negotiations should be to increase domestic policy autonomy, while being mindful of the possible harm to trade partners. Poor and rich countries alike need greater space for pursuing their objectives. The former need to restructure their economies and promote new industries, and the latter must address domestic concerns over inequality and distributive justice. Both objectives require placing some sand in the cogs of globalization.

4. Global governance should focus on enhancing democracy, not globalization.

5. Nondemocratic countries like Russia, China and Saudi Arabia,  where the rule of law is routinely flouted and civil liberties are not protected, should not be able to count on the same rights and privileges in the international system as democracies can.

When I present these ideas to globalization advocates, they say the consequence would be a dangerous slide toward protectionism. But today the risks on the other side are greater, namely that the social strains of hyperglobalization will drive a populist backlash that undermines both globalization and democracy. Basing globalization on defensible democratic principles is its best defense.