The era of free-market capitalism launched in the 1980s by British prime minister Margaret Thatcher and US president Ronald Reagan — often called “neoliberalism” by its opponents — 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 leaders in the US 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 as a new wave of left-leaning leaders came to power. Russia, which adopted market-oriented reforms in the 1990s, moved to a managed form of state capitalism in the 2000s with “oligarchs” forced to submit to state control.
As a result, the US, the European Commission and the multilateral development banks have become increasingly isolated in their efforts to advance free-market thought and policies worldwide. The deepening financial crisis weakens their position further. After all, how can the US or the Western multilateral institutions advocate bank privatization 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, the UK 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 a market economy, the free-market model’s fierce ideological opposition to a large state role in the economy offered a poor guide to building them.
After some successes, most notably in Chile, “neoliberal” advice in Latin America also failed, most dramatically in the case of Argentina’s currency board, but most damagingly by increasing inequality, which worsened the continent’s central political-economic problem. 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 stronger state hand in the economy.
Belief in “neoliberalism” was also 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 outside the US. 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 on many of these issues.
The US elites turned a blind eye to these developments, rejecting all criticism, together with the crude anti-Americanism with which it was often expressed. Today, the story is different. A massive reassessment is finally in progress, with US elites now recognizing that market capitalism is in crisis and that the world will not blindly follow their lead.