Bye-bye neo-liberalism

A lot of the early trepidation about the British vote to break from the European Union has eased. Global stock and currency markets have recovered from the shock and panic generated by the unexpected referendum outcome. The value of sterling bounced back above pre-vote levels. The fast recovery has startled world organizations like the International Monetary Fund and Organization for Economic Cooperation and Development. Internationally famed investors and economists like George Soros and Larry Summers could be embarrassed for raising alarms about a crisis as big as the 2007-2008 financial meltdown and a catastrophe for financial markets should the so-called Brexit become a reality.

Their predictions may actually turn out be a bluff. Black Friday ended Friday, the day following the British referendum. Continuing friction between Britain and the European Union in the negotiations of the exit could produce sporadic upsets to the markets, but the world may have passed through the worst.

Recovery came faster than anticipated because of quick damage control by governments around the world. The market also calmly reminded itself of Britain’s relative small share of the global economy. For the British, they may be feeling happy to be free from all the bureaucratic meddling and regulations from the EU. Considering the upside, Britain’s choice to leave may not have been all that bad. The shock and fear was not really related to equities, currencies, trade or gross domestic products. What the world dreaded was the start of a sea change in the global economic order, the ebb of neo-liberalism, the philosophic concept behind free trade, deregulation, liberalization and globalization.

Neo-liberalism championing globalization and small government has been the keystone of the global economic order since the 1980s. Common growth was the motto of the globalization campaign. The British questioned decades-old economic dogma through a referendum. They chose to break from a single communal bloc because they feared for their own jobs and livelihoods. Anxiety and anger were, ultimately, the worst fallout of globalization. That is why economists are seriously contemplating a new order and concepts to replace neo-liberalism.

Criticism and fundamental questions about globalization and neo-liberalism mostly come from weaker countries and liberal political camps. The rich and established have less to complain about. Many have long become disillusioned with globalization being considered a magic potion for economic woes. In fact globalization has only made people more discontent and restless about their futures. Many would also agree that globalization deserves a lot of blame for income and wealth disparities. Globalization is synonymous with liberalization. The strong survive, and the gap between the strong and weak only widens in such a system. According to the IMF, the competition index has tripled around the world over the 40 decades since 1962. The pressure to compete and survive deepened as markets became more interconnected and globalized.

Polarization also deepened. Korea’s wealth inequality also accelerated amid globalization since the mid-1990s.

Yet globalization proliferated — and this is ironic — to serve the weak. The world has gotten so intricately connected and liberalized that it cannot be fought even if we want to. If a country fails to get on the bandwagon, it can fall behind. It must go with the current if it does not want to go astray.

The Brexit vote, however, upset that belief. To go against the tide did not mean a disaster. The awakening was a bigger shock because it came from Britain, the birthplace of globalization. The concept has its roots in imperialism. The British were the first to adopt and champion less government control and regulation. Now they have become the first to depart from those notions. The IMF, whose role stems from the principles of neo-liberalism, is also changing. During the Asian financial crisis, the IMF was a cold-blooded commander-in-chief. It believed inequality was a price to pay for growth. But starting two years ago, it has been preaching that equality aids sustainable growth. It admitted that neo-liberalism is not an answer for all. The United States could be the next to come forward with a mea culpa. Agitation and disgruntlement about the side effects of globalization and disparities are simmering in the United States ahead of the presidential election.

In one way or another, the global landscape will inevitably change to address the anxieties and polarization arising from globalization. What if the alternative choice is protectionism and isolationism? What if trade growth falls below global economic growth? Korea could become the biggest casualty as the economy has benefited most from globalization. Growth driven by manufacturing and exports is a theory from the textbooks used in the school of globalization. The Korean economy could not have come this far if not for globalization.

So what does all this mean for us? We must closely watch and study the developments. We will have to get actively involved in the discussions to draw up new global rules to ease polarization. Seoul made a timely choice to decide to initiate a free trade pact with London. What must not be interrupted is our own restructuring and structural reform efforts. Our economy must be retooled. The weak companies must be deleveraged. But more urgently, structural reforms to build a new growth model must be expedited. We must come up with a way to promote competition while balancing growth as in the model led by Sweden.

JoongAng Ilbo, July 1, Page 28

*The author, a former editorial writer of the JoongAng Ilbo, is an adviser at the Korea Institute of Finance.

Kim Yeong-ook