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U.S. President Donald Trump is currently staging a trade war against the EU and China with steel and aluminum tariff bombs in his hand. He is threatening formidable trade partners, accusing them that their trade with the U.S. has been unfair.
The neo-liberal policy paradigm has been criticized because it kept failing to prevent global economic and financial crises. Neo-liberalism evolved from classical liberalism after the Great Depression of 1929-1932.
Classical liberalism arose about 250 years ago in opposition to state-imposed religion and aristocracy. John Locke (1632-1704), Francois Quesnay (1694-1774) and Adam Smith (1723-1790) were leading neo-liberals. Locke believed that people were entitled to natural rights such as democracy, liberty, and equality. Quesnay was a French philosopher who coined the term, laissez-faire.
Adam Smith is called the father of modern economics. He reinforced the laissez-faire philosophy. He said that the "invisible hand" is guiding the course of free markets so that if people are left free to pursue their own economic self-interest, the market will move in the direction of greater prosperity for a greater number of people.
Classical liberalism was harshly criticized when the Great Depression broke out. The depression started in the U.S. after a tumble in stock prices in October 1929. The automatic market adjustment failed to function and classical liberalism lost much of its light.
During the Great Depression, John M. Keynes (1983-1946) challenged the policy paradigm based on classical liberalism. He said that aggregate demand determined the overall level of economic activity and that inadequate aggregate demand could lead to prolonged periods of high unemployment. So he strongly advocated fiscal spending policy.
In opposition to Keynes, Milton Friedman (1912-2006), the leader of the Chicago School, argued that the downward turn in the U.S. economy would merely have been an ordinary recession if the Fed had taken the expansionary monetary policy. He was a neo-liberal and strongly believed in the working of market mechanism. But he also acknowledged the role of government in education, national defense, environmental protection, among others.
In 1938, 26 intellectuals including Ludwig von Mises (1881-1973) and Friedrich von Hayek (1899-1992) attended a meeting called "the Walter Lippmann Colloquium," held in Paris. It was named after American journalist Walter Lippmann (1889-1974). He won the Pulitzer Prize twice. At the meeting, the term neo-liberalism was coined by Alexander Rustow as a rejection of collectivism, socialism, and laissez-faire liberalism.
Neo-liberalism began to be widely known after the launching of the Mont Pelerin Society (MPS) in April 1947. Hayek and Friedman organized the MPS. Its founding members were 39 neo-liberals. The aims of the MPS have been: (1) to facilitate an exchange of ideas between like-minded scholars; (2) to strengthen the principles and practice of a free society; and (3) to study the workings, virtues, and defects of a market-oriented economic system.
The neo-liberal values such as market liberalization, privatization, and property protection are ingrained in the Washington Consensus which prevailed from the late 1980s. This term was first used by John Williamson in 1989 as he explained the reform policies set by the Washington, D.C.―based institutions such as the International Monetary Fund (IMF), the World Bank, and the U.S. Treasury.
These institutions provide long-term concessionary loans for developing countries but they impose the execution of reform policies on the borrowing countries as part of loan requirements. The success of this policy reform is not guaranteed because neo-liberal policy reforms alone are not enough. The success of the reform depends also on the country's political leadership, the people's education level, and the capability of bureaucrats.
After the 1997-98 Asian financial crisis, the Group of Twenty (G20) was founded in December 1999. Its aims were to discuss policy pertaining to the promotion of international financial stability. The G20 is an international forum for the governments and central bank governors from 20 power countries. However, the G20 Forum was useless in preventing the global financial crisis of 2007-2008.
This global financial meltdown is the result of global trade imbalances among the three gigantic economic powers _ China, the EU, and the U.S. China is the leader of socialist countries. The U.S. is the leader of free capitalist countries. The EU is comprised by 28 member states. So the adverse effects of their trade imbalances would last long.
The major problems of global imbalances are: (1) China is siphoning off jobs from the rest of the world with lower wages; (2) China is subject to foreign criticism for its alleged currency manipulation due to its unpredictable foreign reserve policy; (3) the openness of China's financial and capital markets is limited compared to the EU and the U.S.; (4) Germany captures the greatest trade benefit among the EU states; (5) The U.S. trade deficit tends to continue because the U.S. dollar is the most undefeatable reserve currency in the world. These problems cannot be corrected soon.
Under these circumstances, neo-liberal policies alone cannot address global imbalances or global financial crisis. China must decrease its savings whereas the U.S. should increase its savings. The three power countries should all refrain from imposing tariffs. China's foreign reserve policy should be transparent. The world desperately needs a new policy paradigm.
Dr. Jeffrey I. Kim (ickim@skku.ac.kr), former foreign investment ombudsman, is a professor emeritus at Sungkyunkwan University. He earned a Ph.D. in economics at the University of Chicago and taught at the University of Colorado, Boulder, and the American University, Washington, D.C.
