Editorial Cartoon - Jack Ohman

A few days after writing about how we're not heading towards socialism in the US, Joseph Stiglitz is in Vanity Fair saying that might not be true about the rest of the world.

Stiglitz argues that the lesson many countries in the Third World might take from the financial crisis is that capitalism is fundamentally flawed.

Following that realization could be a shift back to socialism -- maybe not back to old Soviet-style politics once embraced by much of the Third World, but to "a variety of forms of excessive market intervention," Stiglitz says.

It's a trend worth thinking about, but I think Stiglitz takes it a bit too far:

He wants to portray the economic history of the Third World as a pendulum swing from extreme socialism to extreme capitalism, with the pendulum now ready to swing back the other way.

According to Stiglitz:

"The former Communist countries generally turned, after the dismal failure of their postwar system, to market capitalism, replacing Karl Marx with Milton Friedman as their god. The new religion has not served them well."

I'm going to assume that when Stiglitz refers to "former Communist countries," he means countries that were once parts of the Soviet Union.

It's true that countries like Estonia, Latvia, and Lithuania have made extremely liberal economic reforms, and have also experienced massive economic contractions due to the financial crisis.

But is there any evidence that they would have done better if they hadn't made those liberal reforms?

One can point to several other countries that retained socialist policies, but were just as bruised by the global recession -- Ukraine, Argentina, and Ecuador, for example.

More fundamentally, the idea that the developing world has become a libertarian paradise that failed is just not backed up by the facts.

The Cato Institute publishes an annual Index of Economic Freedom, that basically gives every country a score based on how close they are to laissez-faire.

If you look at this map of the world according to the Index, you'll see that generally speaking, the countries that were in the Soviet sphere of economic influence during the Cold War still have massive government intervention in their economies -- in particular, most of Africa and Latin America.

If these countries learn the wrong lessons from the financial crisis, it will not be a sea change as much as a continuation of many of the same policies.

Joseph Stiglitz Excerpt:

My concern here is more with the realm of ideas.

I worry that, as they see more clearly the flaws in America’s economic and social system, many in the developing world will draw the wrong conclusions. A few countries —- and maybe America itself —- will learn the right lessons.

They will realize that what is required for success is a regime where the roles of market and government are in balance, and where a strong state administers effective regulations. They will realize that the power of special interests must be curbed.

But, for many other countries, the consequences will be messier, and profoundly tragic.

The former Communist countries generally turned, after the dismal failure of their postwar system, to market capitalism... . Many countries may conclude not simply that unfettered capitalism, American-style, has failed but that the very concept of a market economy has failed, and is indeed unworkable under any circumstances.

Old-style Communism won’t be back, but a variety of forms of excessive market intervention will return. And these will fail.

The poor suffered under market fundamentalism -— we had trickle-up economics, not trickle-down economics. But the poor will suffer again under these new regimes, which will not deliver growth. Without growth there cannot be sustainable poverty reduction.

There has been no successful economy that has not relied heavily on markets.

Poverty feeds disaffection. The inevitable downturns, hard to manage in any case, but especially so by governments brought to power on the basis of rage against American-style capitalism, will lead to more poverty.

(c) 2009 U.S. News & World Report

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