There's more than one way to liberalise
Why reports of the death of liberal capitalism are exaggerated
We’ve been here before. Rising inflation, sluggish growth, persistent unemployment and eye-watering fuel prices were all economic bugbears of the 1970s.
Then, the response was economic liberalisation – the loosening of regulation and the beginnings of globalisation, as barriers to the movement of goods and capital was relaxed or removed altogether. In Britain and America, Government relinquished influence whilst the private sector gained elbow room as Ronald Reagan and Margaret Thatcher unleashed the market-based theories and policies of Milton Friedman and Friedrich von Hayek.
All this is familiar – but it’s far from the whole story of economic liberalism. Inflation, oil shocks and slow growth – as well as flared trousers, glam rock and avocado bathroom suites – also afflicted Canada and Australia, which responded with their own programmes of liberalisation.
With similar cultural influences, economic challenges and policy responses, you’d expect the effects to be much the same as they were in the US and UK. But a comparison of the four countries’ banking sectors is revealing. Australian and Canadian banks came out of the decade preceding the current crisis rather better in terms of market capitalisation. Compared with 1999, the largest Australian and Canadian banks gained $85.6 billion and $97.5 billion, respectively, whilst those of Britain and America lost $244.3 billion and $676.1 billion.
The contrast is even starker when the bank bailouts are considered. By March 2009, American rescue packages amounted to 6.8% of GDP; and British a staggering 19.8%. By contrast, Australia used only 0.1% to help struggling banks and Canada, nothing at all. The suggestion that the crisis represents the failure of liberal capitalism may thus be premature.
So why does economic liberalisation, so far at least, seem to have been more successful in Canada and Australia? There is no single answer, as a number of factors combined to evolve a stronger regulatory culture in both countries.
There is however, a smoking gun: the absence of a strong ideological platform. Neither Canada nor Australia had a Reagan or a Thatcher. Whilst the return to economic liberalism in the US and UK were kick-started by powerful conservative administrations, with both the desire and the power to push through a programme of radical change, the Canadian and Australian approach was much more incremental, involved a stronger role for the state and was, for the most part, implemented by Liberal and Labour governments.
Another major factor in setting limits on the imposition of a single-minded economic vision is countervailing power. In both Canada and Australia, this was provided by the political and economic strength of regional government, something largely non-existent in Britain, and much more diffused in the United States. The concentration of this influence in a few powerful provinces was to prove a decisive ‘failsafe’ in terms of ensuring that each stage of economic liberalisation was accompanied by matching prudential regulation.
Equally important are the contrasting responses to earlier crises. The Australian ‘corporate cowboys’ of the 1980s played havoc with some sections of Australian industry. Using leveraged buyouts, their activities ultimately triggered a major recession. And following a titanic struggle between the radical investment bankers and the more conservative commercial types, a more prudential environment emerged. But the result could easily have gone the other way.
The American Savings and Loans crisis of the 1980s featured many of the factors involved in the latest imbroglio: significant loosening of regulation, a property bubble fuelled by excessive leverage and poor lending standards, formulaic assessment of risk and, of course, our old friend, the Collateralised Debt Obligation. The resulting collapse cost America around $210bn, much of which was picked-up by the taxpayer. But the crisis did not shock America into reform. Instead, further deregulation ultimately provided fuel for the sub-prime bubble.
In Britain and Canada, the tremors were in individual corporate failures, rather than wider crises. Nevertheless, the responses were diametrically opposed. The Canadian reaction was to strengthen prudential regulation and condense it into a ‘twin peaks’ structure, similar to that which evolved in Australia. By contrast, London’s light touch approach was continued – and in some danger of evolving into something more akin to a lover’s caress.
Thus, whilst all four countries had looked into the abyss, two fenced it off and the others contemplated its potential for risk sport instead.
What emerges is a clear divide in the theory and practice of economic liberalism, based largely on the balance of power between government and the private sector. The British and American approaches saw a far more direct application of neo-liberal theory and dogma whereas the Canadians and Australians maintained a much stronger and more active role for the state, which so far, seems to have curbed the worst excesses of the private sector, but without smothering opportunity.
Putting a bigger engine in a car makes it go faster. But keeping it on the road for any length of time requires that the steering, brakes and suspension are upgraded to match. Economic liberalisation can produce a road train for the long haul. Or it can create a dragster for a spectacular – but inevitably fleeting – burst of speed.
Panel discussion: 29 June 2011
Dr Sue Konzelmann is Director, and Marc Fovargue-Davies is a Research Associate, at the London Centre for Corporate Governance & Ethics at Birkbeck, University of London. She will be chairing a panel discussion on varieties of liberalism at Birkbeck, University of London on Wednesday, 29 June, as part of Birkbeck Business Week.