2008 Global Financial Crisis and Challenge on Liberal Ideas - Case Study Example

2008 Global Financial Crisis and Challenge on Liberal Ideas Name Institution Course Tutor Date Liberalism was a dominant ideology in the twentieth century. It defined the international economic order. In fact, it widely gained a growing acceptance as a way of managing the economies. Initially, liberal economic ideas were dominated by external economic policy. After the Second World War, General Agreement on Tariff and Trade (GATT) was set up with its objective being to reduce tariff barriers in a progressive manner in mitigating the damages caused by 1930s global economic depression. Essentially, the philosophy of GATT was liberal (Johnson & Turner 2010, p. 21). In the beginning, GATT was successful as tariffs went down in 1950s hence adoption of removal of non-tariffs barriers became popular. GATT was succeeded by World Trade Organisation (WTO) whose membership was composed of purely developed countries upon its establishment (Johnson & Turner 2010, p. 21). It continued to support liberalism and free markets and in 1970s, neo-liberalism was created. It was not until 2008 global financial crisis that liberal ideas were challenged. In the wake of the crisis, liberal ideas were blame for the global meltdown and have since been widely challenged. This essay discusses the global financial crisis of 2008 and the challenge on the liberal ideas blamed for the crisis. The 2008 financial crisis began in the United States with financial markets undergoing major shocks and turbulences which were contributed by the collapsing of mortgage loans. This was preceded by sharp rise in delinquencies of subprime mortgage loan caused by house market booming business (Prascevic 2009, p. 7). The crisis further spread to the real sector of the economy from the financial sector which initiated the global economic recession. The policies that were taken in the developed nations in 2007-2008 as initial signs of the crisis became evident constituted aggregate demand management policies. World trade organisation continued with the philosophy of its predecessor of leaving the economy to regulate itself through forces of competition. The themes of liberal policies received support from many countries which had previously rejected liberalism. For example, in 1990s, many former communist countries applied for membership to join WTO after they acknowledged benefits of free trade. In 2001, China joined the organisation while Ukraine joined in 2008 (Jonhson & Turner 2010, p. 21). Liberal economic ideas permeated much of the domestic economic policy management thinking by the end of 1970s. In addition, neo-liberalism has been the dominant political-economic ideology that defined the world economy and state since the same period. Neo-liberalism is a theoretical political-economic commitment to fundamentals of laissez-faire market with minimal state intervention role into the economy (Schultz 2010, p.11). Apart from free trade, neo-liberalism also includes privatisation and deregulation. During 1950s and 1960s, Keynesian economics was the predominant ideology particularly the belief that governments could undertake significant control in the economies through management of demand (Johnson & Turner 2010, p. 22). However, the 1970s international economics troubles challenged most of the economic policy assumptions. Forms of neo-liberalism such as ‘liberal market economies’ emerged with new economic orders in United Kingdom proposed by Prime Minister Thatcher and in United States by President Reagan (Gilpin 2009, p. 188). Although liberal economic thinking became extensively popular in the United Kingdom and United States, it also began to influence economic policies in Australia, New Zealand and Canada. The adoption of this new economic order by the rest of the developed world was done in conformity with the specific political and cultural framework of the individual countries. For example, by the middle of 1980s, liberalism was so pervasive that it formed foundation of the European Union single market transformational programme (Johnson & Turner 2010, p. 22). Ideology of free market was quickly accepted in the developing world with countries such as South Korea, Taiwan, Hong Kong and Singapore accepting the benefits of external economic policy openness. Liberal economic policies gained roots in form of privatisation, deregulation and a general reduced state control. These policies started to be introduced in Africa, Latin America and other parts of Asia albeit with varying degrees. Communism was soon replaced by economic liberalism following the collapse of Berlin Wall in 1989 and the Soviet Union disintegration in 1991(Johnson & Turner 2010, p. 22). In summing up, greater openness that was brought by liberal ideas and policies encouraged emergence of strategy and mindset that operated beyond the traditional boundaries of the national market. The liberal ideas made a remarkable comeback into international economic thinking owed to Great Depression and the two World Wars (Gamble 2014, p.18). In particular, after 1945, economic liberalism dominated the economic thinking. It since had a lot of support from various quarters until the financial crisis of 2008 which inevitably challenged the liberal economic policies that are taken in the market economies. The 2008 financial crisis triggered a severe global crisis that has not been experienced since the 1930s Great Depression. The Global Recession of the 2008 was characterised by a lower economic output, global equity values and global trade during its first 10 months than what was realised in the first ten months of the Great Depression (Eichengreen & O’Rourke 2010, cited in Drezner 201, p. 345). The effects of the economic downturn saw the economies of Pacific Rim suffer drastic reductions of exports. In the least developed countries, trade credit was tightened and private capital flows was withdrawn immediately. Global economic governance has been subjected to profound stress due to the shocks to the liberal system by the financial economic crisis. The global crash of 2008 challenged the liberal ideas in many ways. Furthermore, it also raises questions about the prevailing paradigms and government interventions. The approach of the government in regulating the economy by taking minimalist approach in the economy was also questioned. Schultz (2010, p. 14) asserted that such approaches were not neutral and maybe it was the major reason for the global meltdown. In addition (Boulle 2009, p. 18) explain that absence of regulation in allocation of market-based credit was the main cause of 2008 global financial crisis. Secondly, the responses of the government to the crisis raise questions over public administration. Third, 2008 financial crisis challenged the notion of desirability of flat, frictionless and open borders of the world described by Freidman (Schultz 2010, p. 14). Analysing these points together raises fundamental questions concerning the role of government and its relationship in the market. Such questions include whether government is an inferior partner in delivering goods and services, if they are the only economic behaviour regulators preventing market failures or they are important agents in construction and enforcement of markets. In addition, challenging the liberal ideas include attack on desirability of privatisation, deregulation and selling of state-owned enterprises. These are the challenges posed by the 2008 financial crisis to the neo-liberal state. The financial meltdown of the 2008 led to many undesirable effects to the economies all over the world. Governments around the world engaged in deficit spending and fiscal stimulus and central banks acted as the lenders of the last resort (Patomaki 2009, p. 436). It brought fiscal crisis in the developed nations as private debts were shifted to public debts. Furthermore, the government embarked on budget stimulus package and massive bank bailouts. It resulted in rise in sovereign debt in Europe and United States (Manne 2010, p. 13). Widespread calls for change in the way national and international markets are regulated were echoed by many stakeholders in economy. In some way, 2008 great recession ushered in Keynesian ideologies especially in matters concerning economic policy. Supporters of Keynesian system call for change of the liberal system. They offered various proposals that include monetary policy use in countering cyclical fiscal policy, enforcement of national and global policy coordination (Juego & Schmidt 2009, p.12). Moreover, it also proposed creation of New Bretton Woods and establishment of a unit of the world currency. Revival of Keynesian approach can be seen in the stimulus packages that Australian government began as a response to the financial crisis (Maddison & Denniss 2013, p.43). This is the principal example of application of Keynesian economics which is a departure of the liberalism of leaving the market to regulate itself. The government responses to the 2008 financial crisis were in accordance to the Keynesian economic theory which raises questions as whether there is a shift towards post neo-liberal era. This may depend on whether Keynesian measures are permanent or temporary, can the effects of crisis be fully allayed or there will be more consideration of neo-liberal programme by adopting Keynesian macroeconomic policies. Privatisation and minimal interference of markets by the government are the main cornerstones of liberal ideas. They see privatisation as a successful feature characterising the market system owed to its benefits that include efficiency, service expansion, and resource allocation. Although privatisation of major government enterprises often lead to realisation of the desired effects but there exist failed examples of privatisation. Due to financial crisis of 2008, nationalisation or quasi-nationalisation of several manufacturers, banks and other previously private enterprises was undertaken (Boulle 2009, p. 28). This is in contradiction of the privatisation policy and a direct challenge of liberal ideas taken in response to the 2008 global financial meltdown. Extensive debates began in 2008 in the wake of global economic crisis concerning regulation of financial credit, hedge funds and rating agencies in making them more accountable and transparent (Boulle 2009, p.49). Re-regulation of financial sector was seen as the solution to prevention of future economic crisis but not enough to mitigate all the problems posed by liberalism. Neo-liberalism has the dominant ideology in international economic thinking for more than four decades but the global financial crisis in 2008 raises issues as to the desirability of the system. In essence, neo-liberalism was blame for the economic crisis which is based on efficient markets and self-regulation. It is also based on reduction of controls of capital movements, de-regulation of labour or credit markets and privatisation. Although liberal ideas and policies have been widely supported for its benefits such as efficiency in running businesses previously state-owned, greater freedom of conducting trade and encouragement of entrepreneurship through lower taxes has been widely challenged since the global 2008 financial crisis. Nonetheless, liberal ideas and policies are still dominant ideology used in international economic circles but it is used together with other forms such as Keynesian macroeconomic policies. References Boulle, L 2009, The law of globalization: An introduction. Kluwer Law International, The Netherlands. Drezner D. W 2013, ‘The contradictions of post-crisis global economic governance’, In M Moschella & C Weaver (eds), Handbook of Global Economic Governance: players, power, and paradigms, pp. 345-360. Routledge, London. Gamble A 2014, ‘Ideologies of governance’, In A Payne & N Phillips (eds), Handbook of the International Political Economy of Governance, pp. 13-31. 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