Unlearning Economics

The Questionable Record of Neoliberalism


Now, I suppose, is as appropriate a time as any to discuss the policies generally known as neoliberalism/free market economics: tax and spending cuts, union busting, deregulation, privatisation and free trade, and how they have fared in practice. Unsurprisingly, those on the right defend neoliberalism’s record. However, successes have been over exaggerated, while in cases of clear success, a closer look reveals policies which are anything but ‘neoliberal’. I’ll take a brief look at some countries or sets of countries which are commonly purported to show the success of these policies: the US & UK, Chile, Hong Kong & Singapore, and Scandinavia. I believe that in none of these instances do we get a clear example of neoliberal policies succeeding economically.


The US and UK had similar narratives during their transition to neoliberal policies. After a period of stagflation, a ‘strong’ politician (Ronald Reagan and Margaret Thatcher, respectively) rose who was willing to enact drastic reforms. The narrative here can be exaggerated – pro market reforms (eg deregulation under Carter) and economy-wide trends (the decline of manufacturing) preceded these two governments. Nevetherless, utilities were privatised, unions were weakened, direct taxes (mostly top tax rates and corporation taxes) were slashed, and various regulations were either cut down or replaced with a more ‘neoliberal’ model. Obviously some ‘free market’ purists will always claim it was not enough, but it was a substantial move in the neoliberal direction, and as such we should have seen clear benefits.

Economic growth under these two governments was decidedly average. If we measure from peak to peak in the business cycle to average out fluctuations, per capita growth under Thatcher comes out at 2.44% (1978-88), while Reagan comes out at 2.3% (1979-90). If we just measure the years they were in office, the respective figures are 2.05% and 2.77%. Whichever way you paint it, growth was not far from its 2.5% trend.

In fact, in both countries the ups and downs of the economy surely had more to do with monetary policy than anything else. Interest rates went as high as 17% in the UK and 19% in the US; around 1983 they had more than halved, dropping down to about 8%; following this GDP started to recover. Insofar as policy goes, the conventional story that neoliberal policies rescued their respective countries is a half truth at best. Thatcher benefited from an oil boom which helped her to fund her various preferred programs (including the Falklands War, which helped buy off discontent). Reagan’s policy of cutting taxes but increasing military spending during a recession was effectively Keynesianism. Ultimately, there is little evidence that the headline reforms were responsible for the overall performance of the economy in either country.

Singapore & Hong Kong

These two countries have certainly had impressive peformances over the past few decades, overtaking most developed countries for GDP per capita. For this reason, they are often touted as free market success stories. This is misleading in a couple of ways.

The narrative about the success of any policy in Singapore and Hong Kong is complicated by the fact that they have some obvious advantages over everywhere else, no matter their policies (within reason). First, they are port cities, which means that unless there are serious political problems, they will be a conduit for a large degree of trade no matter their economic policies. Second, they are city states, which reduces administrative and transaction costs, both in the public and private sectors. Third, Hong Kong does not have to fund a military due to protection from China, which helps to explain its low tax rates.

In any case, the two countries are anything but a paragon of the ‘free market’ in action. In Hong Kong, the government owns all of the land. In Singapore, the government owns about 60% of the land, heavily regulating its usage, while government-linked corporations produce up to 60% of GDP. Both countries have public health care, transportation and education, public housing programs and safety nets, and Singapore owns public utilities while Hong Kong regulates them tightly.

Clearly, whatever the success of these countries is caused by, it is not simply ‘free markets’.


The story painted usually painted about Chile is that it went from a poor country to one of the richest in Latin America after ‘free market’ reforms were put in place by the dictator Augusto Pinochet following the 1973 coup d’etat. What actually happened (from a policy perspective) was much more of a mixed bag, combining both neoliberal programs with long-standing state directed ones.

Key industries remained either directly in the hands of the state (such as copper and oil) or in receipt of subsidies, advice and management, and training through the government organisation CORFO (such as forestry and fishing). These state-directed industries experienced massive growth and fueled an export boom, which drove the economy for decades to come. It is true that some industries, such as banking, were privatised and deregulated, but this was far from a success: it produced a financial bubble, which collapsed in 1982, reducing GDP by 14%, back down to where it was in 1970. Only 5 out of the 19 banks that had been privatised remained, (reluctantly) bailed out by the government, which also had to reinstate capital controls and other interventions. Furthermore, once democracy was reinstated in the 1990s, governments moved leftwards and embarked in significant, successful poverty reduction programs.

This is clearly at odds with the idea of Chile as a free market success story. In fact, I’d go so far as to say that in the case of Chile, success was clearly concentrated in areas with obvious state intervention, while failures were concentrated in those without.


Scandinavian countries are a synonym for economic success, faring well in GDP per capita, but even better in overall standard of living indexes. So it is no surprises that both sides of the debate claim them as their own. The claim is more perplexing when coming from the right, however, since it requires them to effectively claim that countries which are clearly social democracies are not social democracies. It is generally asserted that beneath the high tax rates, these countries are ‘economically free’, which roughly translates as lightly regulated. So are they?

Disregarding such nonsensical indexes as Heritage and heading for the more credible OECD, we can see that Scandinavian countries have average to low strength regulatory frameworks by the standards of developed countries:

In case you were wondering, there is no clear correlation between this index and GDP growth.

While, with the exception of Sweden, the Scandinavian countries have below average regulation indexes, if this were causing their success then surely the US, UK and Spain would be doing well, too? Perhaps low regulation must be combined with a strong safety net and public services to work. More likely, the Scandinavian countries are unique and have specific institutions that cannot necessarily be emulated elsewhere, something I’ve argued before.

In fact, that last point is true of every country. The path to development and sustained growth  is different for every country, and the recipe for growth cannot be captured in vague platitudes about a ‘free market’, completely devoid of context. I expect that there exist countries where neoliberal reforms are appropriate, but these are far outweighed by one where they are not. The people best suited to decide which reforms are appropriate are those who live in and understand the country, not outsiders with a one size fits all model that they see as a neutral template. This was clear even in Chile, where the national military were reluctant to abandon the state-driven model on which they had always relied.

I expect those who support neoliberalism might look at this article and conclude that countries would do even better if only those last pesky statist policies were removed. But this is a superficial perspective. Why were the state-supported industries much more successful than the privatised ones in Chile? Why do Scandinavian countries do well with high tax rates and big welfare states, when many countries with similar strength regulatory frameworks and smaller welfare states do much worse? Why does every purported ‘free market’ success story collapse under close inspection, and why are there no clear real world examples of the ideal being implemented and working? Until I can see such a case I will remain unconvinced of the virtues of the elusive free market.