By Mitchell A. Orenstein
THE era of free-market capitalism launched in the 1980s by then British premier Margaret Thatcher and US president Ronald Reagan - often called 'neoliberalism' - is over.
This ideological wave has crashed with the ongoing financial market crisis, but its decline was a long time coming. In the last few years, while American leaders continued to ride the neoliberal wave, much of the rest of the world was already standing on the shore.
Disenchantment with 'neoliberal', pro-market ideas began in developing countries that had once been their ardent admirers. Latin American countries that embraced free-market policies in the 1990s rejected them in the mid-2000s. Russia, which adopted market-oriented reforms in the 1990s, moved to a managed form of state capitalism in the 2000s, as its 'oligarchs' were forced to submit to state control.
As a result, the United States, the European Commission and the multilateral development banks have become increasingly isolated in their efforts to advance free-market policies worldwide. The deepening financial crisis weakens their position further. After all, how can the US or the multilateral financial institutions advocate bank privatisation now?
The decline of free-market orthodoxy in the rest of the world was caused by two factors: its failures as an approach to economic policy and the decline of US prestige and 'soft power'.
'Neoliberalism' grew in popularity as a result of its successes in jump-starting economic growth in the US, Britain and some developing countries in the 1980s and 1990s. However, its weaknesses also became apparent during the mid- to late-1990s. The attempt to implant free-market philosophy in Russia, for instance, proved catastrophic. Whereas the Russian experience clearly demonstrated the importance of strong state institutions in regulating market economies, the free-market model's fierce opposition to a large state role offered a poor guide.
After some successes, most notably in Chile, 'neoliberal' advice in Latin America also failed, most dramatically in the case of Argentina's currency board. In Brazil, President Luiz Inacio Lula da Silva showed that significant departures from free-market prescriptions worked better. Worldwide, most of the high- growth countries of the 1990s and 2000s broke with free-market orthodoxy by maintaining a strong state hand in the economy.
Belief in 'neoliberalism' also was based on the success of the US economy, which for much of the 1990s seemed to demonstrate the superiority of free markets. But the rapid decline of US prestige and 'soft power' during the 2000s sowed doubt. As the global agenda shifted to concerns about global warming, inequality and the stability of the international system, the US no longer seemed to be a shining example, but rather an immovable obstacle.
America's elites turned a blind eye to these developments, rejecting all criticism. Today, the story is different. A massive reassessment is finally in progress, with US elites now recognising that market capitalism is in crisis and that the world will not blindly follow their lead.
But that leaves some large questions unresolved. If 'neoliberalism' has failed, what comes next? And what must the US do to regain its stature and influence in the international economy?
As New York and London lose their undisputed claim to being the world's financial capitals, the rising centres of the global economy will gain an increasing say in international economic policy. Most, if not all, are located in countries that have a stronger tradition of state involvement in the economy. Professor Jeffrey Garten, Dean of Yale University's School of Management, got it right when he labelled this the era of 'state capitalism'. The state is on its way back as an economic player - not least in the US.
But is that a good thing? While many will be tempted to celebrate the end of 'neoliberalism', it remains to be seen whether what succeeds it will be an improvement. Various forms of statism have been tried before; all have been found lacking. After all, though 'neoliberalism' was technocratic and elitist, it was nonetheless a form of liberalism, and it was consistent with the spread of democratic governance worldwide.
The new era may not be so propitious for political liberties. Rising authoritarian powers such as China and Russia have no reason to use their growing international influence to promote democracy. On the contrary, they will counterbalance the efforts of Western countries to promote political liberty.
As statist models of economic development become more appealing, democratic governance will become less so. Nor is it clear that 'state capitalism' can generate the same degree of innovation and entrepreneurship as the liberal models did in their prime.
In order to redeem the liberal project, American and European leaders will need to reformulate it in such a way that it can provide solutions to problems such as environmental degradation and economic inequality. This will be no easy task, and one that may be far from policymakers' minds as they grapple with the current crisis. But unless they do, the emphasis on economic and political freedom that lies at the heart of liberalism may not survive.
The writer is professor of European studies at Johns Hopkins University's School of Advanced International Studies.