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Western Europe is More Egalitarian and the People there are Happier. WHY?
Phase III:  The Tussles between Social Democracy & Neoliberalism (1970s - Present)

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9 April 2019

Phase II looks at how social democracy as we know it today evolved from orthodox Marxism and went on to help Western Europe not only recover economically from the extensive destructions afflicted by the two world wars but also transform into a welfare state within which a government is the guardian of the society and protector of the citizenry.

In Phase III, we look at how and why social democracy survived the onslaught of neoliberalism and globalization to once again take the ideological centre stage.

Conservative Backlash & the Rise of Neoliberalism & Globalization


By the late 1970s, Western governments were forced to introduce austerity measures amid a powerful conservative backlash based on a new approach of economic liberalism. Known as neoliberalism, it espoused extensive liberalization policies including deregulation and privatization as well as monetarist macroeconomic policies, tax cuts, and withdrawal of the state from many areas of social provision. The approach was aggressively propagated by the British Prime Minister Margaret Thatcher and her ideological soul mate the US President Ronald Reagan following their elections in 1979 and 1981 respectively. 


In the absence of ideological alternatives, neoliberalism soon became the overarching framework for discourse. To facilitate its spread in practice, international institutions such as World Bank, International Monetary Fund and World Trade Organization (WTO) acted in concert to advocate a host of policy measures packaged as the Washington Consensus. The diffusion was also catalyzed by globalization driven by advances in information and communication technologies (ICTs) which greatly reduced the costs of distance and helped businesses tap cheaper labour overseas. Eventually, almost all states had to embrace, voluntarily or otherwise, one time or another, some aspects of neoliberal policies and practices. States that fail to implement neoliberal policies could be punished through bond sell-offs and through runs on their currencies, giving international investors the power to determine the policies of democratic states.


Under neoliberalism, the power of the state (government) to govern was greatly weakened by the increasingly powerful businesses which were growing into multinational corporations (MNCs).

The Negative Impacts of Neoliberalism

The rise in international trade and capital flow, as a result of liberalizations, did help to drive global economic growth but it came with powerful negative economic and social consequences.

In developed economies, workers faced not only rising unemployment but also depressed wages and cut back in state welfare. The compelling message was that rising international competition meant businesses needed to relocate manufacturing operations overseas where cheap labour was abundant while the domestic labour markets needed to be liberalized to enhance competitiveness. Moreover, since investments are driven by the prospects of high profits and low taxes, a case was made to cut both taxes and social welfare. In short, many Europeans believed that hard-won postwar social achievements were been progressively undermined by globalization and the liberalizations promoted by neoliberalism.


Meanwhile, financial deregulation in the developed economies had been associated with the savings and loan (S&L) crisis in the US during the second half of the 1980s, the global stock market crash in 1987, and the Japanese asset market bubble in 1988-1989. In the following decade, it also caused the Mexican debt crisis in 1994 and the Asian Financial Crisis in 1997. Back in the US, in 2000, the debt-financed equity boom ended with the dot-com crunch. By 2008, the unrestrained speculative activities by financial institutions in derivatives led eventually to the eruption of the Global Financial Crisis


Finally, another major negative impact of globalization and neoliberalism is the rising social inequality. During the 1950s and 1960s, the long economic boom was driven by the real sector, and productivity gains were passed on as real wage increases. Even during the productivity slowdown of the 1970s, income inequality did not increase greatly in the high-income countries.


From the 1990s, however, the wages of the working class had stagnated or even declined because of deindustrialization. In contrast, the financial sector's ability to intermediate savings and investment helped those with the wherewithal to extract extraordinary financial gains during what was a boom period for many developed economies. Among the biggest beneficiaries were the companies in the financial sector. Their employees received ever larger bonuses trading on purely speculative financial instruments. Meanwhile, many entrepreneurs also made fortunes from their start up funded by venture capitalists willing to take on the risk of lending to unproven small businesses. The period therefore saw a sharp increase in income inequality in high-income countries, particularly those with more matured financial markets.


Overall, inequality increased most sharply in the neoliberal countries (the US and the UK) and least in the continental European countries, particularly those in the Nordic region. In the UK, for example, 5 million people were living in households with income less than half the average income, just as Thatcher was elected in 1979. By 1991–92, the number rose to 13.9 million or from 9% to 25% of the population. The real incomes of the bottom 10% of the population fell by 17% during the 1990s. Notably, the UK was second only to the US as the most inegalitarian country among the eighteen countries compared in a study conducted.


The rise in social inequality was not limited to the developed economies though. In many emerging economies, inflow of foreign capital and technologies from multinational corporations initially helped to lift masses from poverty by creating jobs. Over time, however, social inequality within these emerging economies also rose as political and business elites were in a better position to benefit disproportionately from the growth in economic activities, often at the expense of the masses, while the masses continued to languish in low-paying jobs amid rising living costs. Moreover, the lower income households were not only less able to profit from the growth of domestic financial market activities but also harder hit by financial crises that were happening in higher frequency and increasing severity. Social inequality widened even as GDP continued to grow in emerging economies.


As the 1990s ended, the broad movement towards neoliberal global development sparked a powerful counterattack but it was not until the 2008 Global Financial Crisis, with its epicentre in the US, that neoliberalism was finally discredited for good.

How Social Democracy Withstood the Onslaught of Neoliberalism


In contrast, despite the rhetoric against the welfare state, there was little sign that European governments had actually retreated in the new post-industrial society. Even though questions were often raised in debates about the nature of the welfare-state, there was never serious doubt about the desirability of having a market-based economic system, to provide efficiency, but backed by a welfare state, to ensure some degree of equality.


On the contrary, amidst continued public supports of state welfare arrangements, the principle of a safety net was extended and the egalitarian side of the welfare state was reinforced. Welfare spending thus continued to increase over the past decades. In the rich industrial countries, the share of government expenditure remained around 45%. On the whole, based on reviews on developments in nine countries (Sweden, Norway, Finland, Denmark, Austria, Germany, the Netherlands, Australia and New Zealand) and on evidence from other studies of developed societies, it was found that there were pervasive but generally modest or at least not system-transforming cuts in entitlements.


Moreover, different societies adopted different solutions to restructuring their economy. The impact of change thus varied across countries, with those embracing neoliberal policies seeing greater restructuring. For example, labour-market polarization was most marked in the UK, where low-paid, low-quality casual work reappeared.


As for the impact of globalization on welfare state, it was noted that the same global forces created different problems depending on the kind of welfare institutions they affect. In the end ‘domestic institutions remain(ed) crucial in mediating any effects emanating from the international economy’. This explains why even though the US and the Nordic countries are all subject to the same forces of globalization but the impacts are a lot more adverse for the common Americans.


The Nordic welfare states, in particular, emerged from the onslaught of neoliberalism relatively unscathed. The source of their strength lies in their state of the institutions, the structure of the political system, and the values of the electorate.


One study, for example, found that even though governments do have a measure of political choice to shift social protection system onto a new path over time, ‘existing power relations, public opinion, policy configuration, and institutional arrangements limit what any sitting government can do’. Moreover, where more consensual politics exists, often founded on systems involving proportional representation, then recalibration or adaptation to new circumstances can be achieved by governments negotiating with key interests without adversarial clashes.

On the whole, the shape and direction of change are fundamentally influenced by the relative power of trade unions and employers, the system of interest mediation and the institutional legacy of a welfare state-regime.

Finally, the resilience of the welfare state also depends simply on the how the electorate vote. For example, in both Sweden and Finland, electorates rejected centre-right governments and brought back the left-wing parties after experience of cutbacks and threats to reduce social expenditure further by the former.

Western Europe more Egalitarian Not by Chance


In short, Western Europe is therefore more egalitarian today not by chance. Rather, it had undergone purposeful transformations over its long history driven by centuries of intellectual awakening which in turn inspired uprisings against the tyranny of the monarchies and the exploitations of the nobilities and the church. By the end of 19th century, however, the bloody and tumultuous revolutions had given way to progressive political evolution leading to the emergence of secular nation states underpinned by the system of social democracy which combines political liberty with social justice promoted and protected by constitutions.

Then in the aftermath of the extensive destructions of the two world wars as well as the economic chaos caused by unchecked capitalism during the interwar years, that spirit of social democracy led to the construction of a new order designed to ensure economic growth while protecting society from capitalism’s destructive consequences. After 1949, states thus became the guardians of society rather than of the economy so that the efficiency of capitalism is exploited for the benefits of not just the minority elites but more so for the common masses.

Will the US Also Embrace Social Democracy?


In contrast, as the flag bearers of neoliberalism, both the US and the UK have become the most inegalitarian among the developed economies.


Take the US for example. During what is now being called the “Second Gilded Age”, income for the top 1% of Americans grew 275% from 1979 to 2007 as that of most Americans stagnated. Today, three men—Jeff Bezos, Bill Gates and Warren Buffett—own as much wealth as the poorest 50% of all Americans while the richest 1% own more than half of stocks. An even deeper and more fundamental problem, as pointed out by Joseph Stiglitz, is the growing concentration of market power, which allows dominant firms to exploit their customers and squeeze their employees, whose own bargaining power and legal protections are being weakened as a result of neoliberal policies and globalization. CEOs and senior executives are increasingly extracting higher pay for themselves at the expense of workers and investment.


Parallel can be drawn with the “First Gilded Age” (1870s – 1900) when big wigs like John Rockefeller, JP Morgan and Andrew Carnegie dominated the American industries and political parties served the interests of the big businesses instead of the electorates’. Often referred to as “robber barons”, these corporate bosses were able to pursue unethical and unfair business practices aimed at eliminating competition and increasing profits. As social disparity widened and problems of unsafe working conditions, child labor, and political and corporate corruption became increasingly widespread and entrenched, many Americans began to question the fairness of free-market capitalism. By the 1890s, efforts by reformist politicians to rein in these negative effects of industrialization led to the onset of Progressive Era lasting till 1920. During this period, the progressives sought to regulate private industry, strengthen protections for workers and consumers, expose corruption in both government and big business, and generally improve society. In the end, common sense ideas such as antitrust legislation, progressive income tax, minimum/living wage and collective bargaining/unionization laws were passed.


Today, questions are being asked whether the US is poised to see a Second Progressive Era of reforms. There is no question that many disaffected and distrustful Americans crave change. They are so anti-establishment that they voted an outsider and a political novice like Donald Trump in as the 45th US president. Their faith in him and in the Republican Party, by extension, soon proved misguided. After coming into office, Trump enacted a tax bill that “gives one multi-million-dollar break after another to the donor class, including the elimination of the inheritance tax,” while doling out “nickels and dimes to the working and middle classes”. To pay for the giveaways to the wealthy, the bill takes away key deductions that have promoted a stable middle class since the end of the WWII. In effect, the tax bill will result in the “massive transfers of wealth from the lower classes to the very wealthy”. In short, social disparity in the US is set to widen even further.


The extreme social inequality has resulted in a significant shift in the American psyche. A survey conducted in January 2019 shows that the majority of Americans believe that the US economic system is rigged to favor the rich. Nearly 70% of respondents said they would be “excited” to support a candidate wanting to fix the system, a position taken by 90% of Democrats and 49% of Republicans. In March 2019, another poll found that Generation Z views the word “socialism” more favorably than previous generations and is more likely to embrace socialistic policies.


Going forward, while it is unthinkable that the US will ever turn its back on the systems of capitalism and democracy, more and more disillusioned Americans may look upon the Nordic model of social democracy as their guiding beacon for the impending Second Progressive Era.

PREVIOUS:  02 The Rise of Social Democracy (1918 - 1970s)


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