The Uneasy Trend to Economic Liberalism

PART 2:

In relation to these past two decades, I offer three overlapping sketches of the evolution of economic policies.

A GENERAL VIEW ACROSS THE WORLD

First, I draw on the extensive evidence on liberalisation which is to be found in the latest report of the "Economic Freedom of the World" project. ⁽²⁵⁾  This provides "economic freedom ratings" over the period 1975-95 for 115 countries.  The ratings are on a numerical scale which goes from zero to a maximum of 10, and bring together a range of indicators.  In most cases, ratings are given for 1975, 1980, 1985, 1990 and 1995, though there are some gaps for the earlier years.  Understandably, there are still areas of policy that are not fully covered by the ratings, while in a number of cases the interpretation they give of developments in particular countries is open to question.  In any case, such indicators at best provide only part of the story. ⁽²⁶⁾  However, I believe that the broad impression of change that the figures convey is accurate enough for them to be used here.  I have therefore taken the ratings as a basis for constructing three summary tables of my own.  Together these offer a preliminary general view of the reform process as a whole, and of the varying extent of liberalisation as between different countries and country groupings.

Reformers and Non-Reformers

In Table 1, I classify all but one of the 115 countries into three groups:  reforming, where the rating has increased;  counter-reforming, where the extent of economic freedom has apparently diminished;  and intermediate, where there has been little change or no clear trend. ⁽²⁷⁾  In this last category, where there was no definite tendency over the period as a whole, there are 25 countries.  Of the remaining 89 countries for which a trend is apparent, or where a decisive recent move has been made, 77 appear as having liberalised on balance, while only 12 have moved in the opposite direction.

Table 1:  1975-1995:  The Geography of Economic Reform

Country Grouping	Number of Countries
	Reforming	Intermediate	Counter- Reforming	Total
Core OECD	23	-	-	23
Asian countries	13	1	-	14
Non-OECD Europe	11	5	-	16
Latin America	15	4	4	23
Sub-total	62	10	4	76
African continent & Middle East	15	15	8	38
Total	77	25	12	114

Source:  J. Gwartney and R. Lawson, Economic Freedom of the World, 1997:  Annual Report.

In one respect, these figures may somewhat overstate the predominance of the reformers, since among the countries excluded for want of data there are several which, even in the absence of a numerical rating, can be classed as non-reforming:  examples are Afghanistan, Belarus, Cambodia, Cuba, Iraq, Liberia, Libya, Myanmar and Sudan.  As against this, however, and much more significant, the figures in Table 1 greatly understate the extent to which liberalisation has been the prevailing tendency, because they count each country as one regardless of size.  In practice, the non-reforming countries are not only in the minority but also, generally speaking, of relatively small economic weight.  If, for example, we take the 12 counter-reformers, their combined GDP for 1990, as given in a recent study by Angus Maddison, ⁽²⁸⁾ was less than 10 per cent higher than the corresponding figure for Canada.  The largest national economy within this group is that of Iran, which in 1990 had a GDP less than that of the Netherlands.  Among the 25 intermediate countries, the largest to be included in Maddison's tables is Nigeria, with a GDP figure for 1990 which slightly exceeded that of Denmark.  The combined 1990 GDP for all the 37 non-reformers taken together is probably not much greater than that of France, while the 77 countries classed here as reforming account for well over 90 per cent of total world GDP.

The ratio of reformers to non-reformers differs considerably as between different groups of countries:  this also appears from Table 1, where five groupings are shown.  First, there are 23 of the core OECD economies (Luxembourg is not covered in the study).  All of these can be classed as reformist -- even though, as will be seen, some of them appear as distinctly lukewarm.  Second come 14 Asian countries, including China (but not Japan, which is included under OECD).  Here all but one count as reformers:  the exception is Nepal, which appears as intermediate.  A third group comprises 16 countries from central and eastern Europe including Russia.  Of these, several are arguably borderline or still-uncertain cases.  I have classified 11 as reformers and five (Cyprus, Albania, Croatia, Romania and Ukraine) as intermediate;  here again, there are no counter-reformers.  Fourth, there are 23 countries in Latin America and the Caribbean.  Of these, four only appear as counter-reformers:  the largest of these is Venezuela, with a 1992 GDP, in Maddison's estimates, roughly equal to that of Belgium, while the others are Haiti, Honduras and (more debatably) Nicaragua.  There are also four Latin American or Caribbean countries, all of them small, which appear as intermediate.  The reformers here comprise 15 of the 23 countries, including the three largest economies of the region -- Brazil, Mexico and Argentina.

Taking these four groupings together, there are 62 countries classed as reforming, including all the 20 largest national economies within the whole set of 114, 10 intermediate cases, and only four counter-reformers.  This leaves 38 countries in Africa and the Middle East, and here the balance is different.  Only 15 of these countries count as reformers, and some of these, as will be seen, have not moved very far down the path of liberalisation.  Another 15 countries appear as intermediate, ⁽²⁹⁾ and eight as counter-reformers.  Besides Iran, this latter category comprises Algeria, Syria, and five countries in sub-Saharan Africa including the Democratic Republic of the Congo (formerly Zaire), Cameroon and Zimbabwe.

On this evidence, therefore, a clear trend towards liberalisation is to be seen in every core OECD country, and in many if not most countries outside this group including the largest economies among them.  Across Europe, the American continent and much of Asia, it is the non-reformers that are exceptional.

The Extent of Reform

Of course, this is only the beginning of the story:  it has to be asked how far liberalisation has actually been taken in the various countries that are classed here as reforming.  Evidence on this, likewise derived from the economic freedom ratings, is presented in Tables 2 and 3.

First, by combining the country ratings, using Maddison's 1990 GDP estimates as country weights, ⁽³⁰⁾ I have constructed a similar "index of economic freedom" for the five country groupings and the world as a whole over the period 1975-95.  These series are shown in Table 2, which covers 61 countries including Hong Kong:  the other 54 countries are left out for reasons of smallness of size or deficiencies of data.

Table 2:  Combined Economic Freedom Ratings, 1975-95

	1975	1980	1985	1990	1995
Core OECD countries (22)	5.3	5.5	5.8	6.6	7.0
Asia (13)	3.1	3.4	3.7	4.5	5.0
Latin America (7)	4.0	3.6	3.4	4.3	4.9
Africa & Middle East (14)	3.5	3.0	3.3	3.6	3.8
Central & Eastern Europe (5)	1.0	2.0	1.6	1.7	3.9
World Total (61 countries)	4.5	4.6	4.8	5.6	6.1

Notes and Sources:  The economic freedom ratings for individual countries are from Economic Freedom of the World, 1997, except for a few cases in 1975 where I made my own assumptions to fill gaps in the series.  I have combined the individual figures into regional and world totals by weighting them on the basis of estimated 1990 GDP, as given by Angus Maddison in the sources quoted in the main text.  The respective percentage weights for the five country groupings are:  core OECD countries, 59.7;  Asia, 24.9;  Latin America, 7.6;  Africa & Middle East, 3.6;  and Central & Eastern Europe, 4.2.

It can be seen that for the world as a whole the progress of reform appears halting over the period 1975-85:  modest increases in the ratings for the core OECD countries and Asia are partly offset by contrary tendencies elsewhere.  For the decade 1985-95 there is a relatively small rise for Africa and the Middle East;  but the other four groups, and hence the index for the world as a whole, all show more substantial increases.  For both the core OECD countries and Asia there is a fairly steady upward trend over the whole 20 years.  In the Latin American region, on this evidence, liberalisation gets under away only from the mid-1980s, while in central and eastern Europe, as one would expect, it is only after 1990 that the effects of economic reform begin to show.

The ratings can also be used to throw light on the comparative extent to which reform has been taken in different reforming countries:  this is shown in Table 3.  The table presents figures for 54 out of the 77 countries identified as reformers:  here again, the smaller countries are largely excluded, except for a few cases where the extent of change is striking.

Table 3:  Changes in Economic Freedom Ratings for 54 Reforming Countries, 1975-95

	Country	Rating			Change
		Initial	(year)	1995	Absolute	% of initial scope for reform
1	New Zealand	4.1	(1985)	8.0	3.9	66
2	Mauritius	3.9	(1980)	7.6	3.7	61
3	Chile	2.7	(1975)	6.4	3.7	51
4	Iceland	2.9	(1980)	6.5	3.6	51
5	Argentina	2.8	(1985)	6.4	3.6	50
6	UK	4.6	(1980)	7.3	2.7	50
7	Singapore	6.4	(1975)	8.2	1.8	50
8	Philippines	4.1	(1975)	7.0	2.9	49
9	Peru	2.9	(1985)	6.3	3.4	48
10	Costa Rica	4.5	(1985)	7.1	2.6	47
11	Thailand	4.8	(1975)	7.2	2.4	46
12	USA	6.1	(1975)	7.9	1.8	46
13	Portugal	2.5	(1975)	5.9	3.4	45
14	South Korea	4.0	(1980)	6.7	2.7	45
15	Norway	3.3	(1980)	6.1	2.8	42
16	Jamaica	3.0	(1980)	5.9	2.9	41
17	Ireland	4.1	(1975)	6.5	2.4	41
18	Australia	5.0	(1975)	7.0	2.2	40
19	France	3.6	(1985)	6.1	2.5	39
20	Taiwan	4.8	(1975)	6.8	2.0	38
21	Czech Republic	2.4	(1990)	5.2	2.8	37
22	Sweden	3.5	(1980)	5.9	2.4	37
23	Mexico	3.8	(1980)	6.1	2.3	37
24	Finland	3.9	(1975)	6.1	2.2	36
25	Poland	1.2	(1985)	4.3	3.1	35
26	Denmark	3.7	(1985)	5.9	2.2	35
27	Malaysia	5.4	(1975)	7.0	1.6	35
28	Israel	2.0	(1975)	4.6	2.6	33
29	Sri Lanka	3.4	(1980)	5.6	2.2	33
30	Spain	3.9	(1975)	5.9	2.0	33
31	Japan	5.1	(1975)	6.7	1.6	33
32	Tanzania	2.1	(1985)	4.6	2.5	32
33	South Africa	3.8	(1975)	5.7	1.9	31
34	Hungary	3.0	(1990)	5.1	2.1	30
35	Kenya	3.3	(1975)	5.3	2.0	30
36	Colombia	3.6	(1980)	5.5	1.9	30
37	Italy	3.6	(1985)	5.5	1.9	30
38	Indonesia	4.7	(1980)	6.3	1.6	30
39	Russia	0.9	(1990)	3.5	2.6	29
40	Turkey	2.3	(1980)	4.5	2.2	29
41	Pakistan	2.6	(1975)	4.6	2.0	27
42	China	2.3	(1980)	4.3	2.0	26
43	Ghana	2.5	(1980)	4.4	1.9	25
44	Greece	3.3	(1985)	5.0	1.7	25
45	Austria	4.7	(1980)	6.0	1.3	25
46	Egypt	2.1	(1975)	4.0	1.9	24
47	Canada	5.9	(1985)	6.9	1.0	24
48	Netherlands	5.5	(1980)	6.5	1.0	22
49	Bangladesh	2.8	(1980)	4.2	1.4	19
50	Brazil	2.3	(1985)	3.7	1.4	18
51	India	3.3	(1975)	4.4	1.1	16
52	Belgium	5.6	(1975)	6.3	0.7	16
53	Switzerland	7.0	(1975)	7.4	0.4	13
54	Germany	5.9	(1975)	6.4	0.5	12

Source:  J. Gwartney and R. Lawson, Economic Freedom of the World, 1997:
Annual Report, op. cit.

The last two columns of Table 3 provide alternative measures of the extent to which reform has been taken in each country during the period 1975-95.  The penultimate column shows the absolute increases in freedom ratings, comparing each country's 1995 rating with an initial figure defined as the lowest for any of the earlier years covered in the study.  The initial year can therefore be 1975, 1980, 1985 or 1990, and is shown in the table in brackets.  Judged by this measure, the top 10 reformers, in descending order, are New Zealand, Mauritius and Chile, Iceland and Argentina, Peru and Portugal, Poland, and the Philippines and Jamaica.  Three notable late starters, where significant increases were realised over the period 1990-95, are the Czech Republic, Russia and Hungary.

The figures in the final column of the table, which are my own, offer a ranking which allows for the cross-country differences in initial pre-reform situations.  The more regulated a country was initially, the greater the scope for reform.  Hence this measure takes into account not only the extent of reform, as shown in the penultimate column, but how this relates to what could in principle have been achieved, given the point of departure:  the reforming countries are ranked by relating the absolute increases in their ratings to the potential for reform at the time when liberalisation was begun.  The potential is given by the difference between the initial rating, as defined above, and the maximum rating which is 10.

The cases of Portugal and South Korea, which appear with equal ranking in the 13th and 14th rows of Table 3, will serve as illustrations.  For Portugal, the lowest rating, of 2.5, was for 1975.  This is taken as the point of departure, when the potential was 7.5.  Over the period to 1995 the rating increased by 3.4, from 2.5 to 5.9.  Expressing this increase as a percentage of the scope for reform, the initial potential of 7.5, yields the figure of 45 per cent which appears in the final column.  South Korea, for which the point of departure is 1980, gets the same percentage, and therefore the same ranking, despite the fact that the increase in its rating from 1980 to 1995 is lower at 2.7, because its initial potential was less than that of Portugal. ⁽³¹⁾

From this final column of Table 3, New Zealand appears as clearly the leading reformer, with Mauritius unchallenged in second place.  After that the percentages fall away gradually;  and in any case, no great significance should be attached to the exact rankings.  However, it is worth noting that in the top third of the table, where the countries have a comparative rating of 40 per cent or more, 10 of the 18 countries come from outside the core OECD group.  Apart from Mauritius, all of these are either from Asia (Singapore, the Philippines, Thailand and South Korea) or from Latin America where Chile and Argentina are the leaders.  Of the largest OECD economies which form the G7 grouping, only two appear in this top echelon -- the UK and the US, in that order.

In the next 20 countries, where the percentages range from 30 to 39, there are three countries from sub-Saharan Africa (Tanzania, South Africa and Kenya) and three from central and eastern Europe (the Czech Republic, Poland and Hungary).  Three of the G7 members -- France, Japan and Italy -- also fall into this group, as do Mexico, Taiwan and Malaysia.

Finally, the 16 countries with percentages below 30 include several core OECD members.  Most of these had high initial ratings but have since, it would seem, made only limited further moves towards reform.  This description fits Austria, Canada and the Netherlands, and even more so Belgium, Switzerland and Germany which appear at the bottom of the list:  indeed, from the evidence of Table 3 alone, one might question the claims of these three latter countries to be classed among the reformers.  Also in this lowest section of Table 3 is a group of countries whose economies were highly regulated at the time when the reforming process first set in, which have indeed been subject to limited reforms, but where liberalisation has still a long way to go:  here the only core OECD member is Turkey.  The group includes Russia, China, India, Bangladesh, Egypt and Brazil.

GROUPS OF COUNTRIES AND AREAS OF POLICY

Moving beyond the "Economic Freedom of the World" estimates, the recent story of reform can also be told with reference to the three groups of countries identified above and seven partly overlapping areas of policy.  These areas are (i) financial markets, (ii) international transactions, including both trade and capital flows, (iii) corporatisation, privatisation and deregulation of industries, (iv) energy policies, (v) agricultural policies, (vi) labour markets, and (vii) public finance. ⁽³²⁾

Looking first at the 24 countries of the core OECD group, four main aspects of liberalisation stand out. ⁽³³⁾

To start with, there are two related areas of policy in which radical reforms have been made, with the effect in particular of bringing economies which were initially highly regulated into line with those which had liberalised already -- and which themselves, in almost every case, have now moved further still.  These two areas are financial markets and cross-border capital flows including direct foreign investment.  Here the most restrictive countries initially fell into three groups:  France and Southern Europe, the Nordic countries apart from Denmark, and Australia and New Zealand.  Now all these countries have abolished exchange controls, made foreign investment flows, inward and outward, far less subject to regulation than was the case, for many of them, 15 or 20 years ago, and deregulated, in many instances substantially, domestic financial markets.  Not surprisingly, there is still scope for the further opening up of financial markets to competition, while most if not all core OECD countries still have residual restrictions on direct foreign investment.  Even so, in these areas of policy the scene has been transformed.

Privatisation and Deregulation

A notable development, which initially was novel and surprising, has been privatisation.  In this, the British government elected in 1979 was the forerunner within the OECD group and a leading practitioner throughout.  Privatisation has proved to be a far-reaching and truly innovative line of reform, which has spread to every part of the world.  At the same time, there has been a clear and widespread trend, in a number of sectors of the economy, towards deregulation:  this has made for freer entry into the industries concerned, and widened the scope for competition both within and across national boundaries.  The industries chiefly affected have been financial services, transport, telecommunications, and power generation.  The main heads of action have been opening up licensing arrangements so as to increase the extent of competition, allowing private competition in markets which had formerly been reserved for public monopoly enterprises, and dismantling of statutory controls over prices and entry. ⁽³⁴⁾

Privatisation can take various forms, and some of these, by limiting the extent to which competition is made possible, are less market-oriented than others.  For example, the British Gas Corporation was sold in 1986 with its monopoly powers still substantially intact, while the rules governing the initial privatisations in France in 1986-88 were specifically designed to restrict the scope for foreign ownership of the assets sold.  Over time, however, there has been a clear tendency to move in the direction of greater liberalism and more open arrangements, whether in the initial choice of methods of privatisation or through subsequent action to promote competition and freer entry in industries that have been privatised.  In this area, therefore, despite the various and often considerable limitations that still remain on the extent to which competition and free entry prevail, liberalisation has gone further than the story of the transfer of ownership might in itself suggest.

On deregulation, however, there is another side to the picture.  How far there has been a general trend towards less regulated economies over the OECD area, looking at economic systems as a whole as distinct from particular industries, is debatable.  In an OECD Secretariat report published last year, which uses a threefold classification of government regulations into economic, social and administrative, the statement is made that "social and administrative regulations ... are expanding rapidly in OECD countries". ⁽³⁵⁾  In a recent review article, John Taylor summarised developments in the US during the 1970s and the 1980s as embodying "conflicting trends ...:  increasing social regulation with inadequate attention to cost-benefit analysis and other economic considerations compared with decreasing economic regulation. ..." ⁽³⁶⁾  This broad generalisation probably holds good for other core OECD countries in relation to the past decade or more.  It is indeed probable that, outside the deregulated industries listed above, a typical business enterprise in many if not most core OECD countries is more closely regulated now than was the case 20 years ago, as a result of the increasing impact of regulations, whether specific or economy-wide, relating to (in particular) the environment, occupational health and safety, the tax régime, and -- as will be seen below -- the freedom to hire.

The Freeing of International Trade

A third area of reform has been trade liberalisation.  Although the core OECD countries are still a long way from endorsing free trade, ⁽³⁷⁾ they have made substantial moves in that direction.  In some instances, notably Japan, Australia, New Zealand and Turkey, liberalisation has in part been unilateral.  But the main developments in the group have taken place through regional and multilateral agreements.  Under the regional heading, there have been the Closer Economic Relations Agreement of 1983 between Australia and New Zealand;  the enlargement of the European Community and the establishment within it of the Single Market, together with the formation of the European Economic Area;  and the association of Canada and the US, with the later accession of Mexico, in what is now the North American Free Trade Agreement.  Although there is room for debate here, my own view is that up to now these various regional integration agreements have served on balance to further the cause of cross-border liberalisation in the world as a whole. ⁽³⁸⁾

Within the European Community, the decision of member governments in 1985 to proceed with the creation of the Single Market was a landmark event.  The Single Market Programme has had both an external and an internal dimension.  As to the former, it provided for the phasing out of all remaining national (as distinct from Community-wide) restrictions on trade in goods.  Its main effects, however, have been to liberalise further cross-border transactions of all kinds within the Community itself.  In relation to one another, member countries bound themselves to free both public procurement and trade in services;  to establish free movement of both capital flows and persons;  and to have regard to the principle of "mutual recognition" of rules and standards, rather than trying to agree in every case on full and detailed harmonisation which (as seen above) may have disintegrating effects.  Although the stated aims of the programme are still some way from being realised, it has brought notable advances towards closer economic integration within the Community.

As to the multilateral aspects of freer international trade, the outstanding event has been the liberalisation eventually agreed to in 1994, admittedly at the end of a long and hard road and with many limitations, as a result of the Uruguay Round negotiations.  Since the conclusion of the Uruguay Round agreement, some progress has been made in giving effect to its provisions, and in providing for further liberalisation within the World Trade Organisation (WTO), as in the recent multilateral agreements relating to information technology, telecommunications, and financial services.  The decision to replace the GATT, which had functioned since 1947, with the newly-constituted WTO which has wider terms of reference, greater powers and a more assured status, is itself evidence that member countries are concerned to strengthen the multilateral trade and investment system and the rules, understandings and procedures that support it.  One expert commentator, John Jackson, has suggested that the establishment of the WTO marks "a watershed in the international system", since the creation of "a definitive international arrangement" has gone together with a remarkable expansion in the range of topics that are covered by multilateral procedures and negotiations. ⁽³⁹⁾

Energy Policies

Fourth, energy policies became clearly less interventionist over the period.  This can be seen in two contrasting declarations of policy that were adopted at different dates by the Governing Board of the International Energy Agency (IEA). ⁽⁴⁰⁾  The earlier statement, which dates from 1977, is a thoroughly dirigiste document.  Goals and directions of change are specified in physical terms, mostly in the context of reducing dependence on energy in general and oil in particular, with administrative measures on the part of governments as the means to realising change.  The word "markets" is not to be found in the statement;  and though prices are mentioned, it is chiefly by way of stipulating that they should be consistent with the predetermined objectives.  Symptomatic of the whole approach is that the list of agreed "Principles" includes "Concentration of the use of natural gas on premium users' requirements [sic]".  By contrast, the second sentence of the 1993 statement reads:  "In formulating energy policies, the establishment of free and open markets is a fundamental point of departure."  The change in tone and wording corresponds to the evolution of actual policies.  As an IEA report of 1992 noted:

From the mid 1980s there has been a significant reduction in detailed government intervention.  Price controls have been lifted, subsidies reduced and barriers to trade in energy removed.  In some countries state owned energy industries have been transferred to the private sector.  The reduction in government involvement is continuing. ⁽⁴¹⁾

Taxation

Last, though perhaps less striking because the momentum of the mid-to-late 1980s has eased off, is the reform of taxation systems.  At the end of the 1980s, after substantial reforms had been introduced in a number of countries, the results were summarised as follows in an OECD Secretariat report of the period:

Although the tax burden has not fallen, tax reforms proposed and implemented, have meant that important progress has been made towards a more neutral, and allocatively more efficient, tax structure in many countries, reducing marginal rates of income tax and disincentives to work, harmonising post-tax yields on capital and spreading the net of indirect taxes. ⁽⁴²⁾

A leading element in these changes has been a general reduction in the top marginal rates for personal taxation of incomes.  At the same time, basic rates of corporate income tax have been brought down in many countries, while the tax treatment of different forms of physical capital has been made more uniform.  There has also been a general trend, over the period as a whole, towards greater reliance on broad-based consumption taxes.  As to particular countries, New Zealand ranks as the leading tax reformer within the group, with the UK, the USA and Canada also high on the list. ⁽⁴³⁾

So much for the main positive aspects -- from a liberal viewpoint -- of developments over this period.  In three of the seven areas of policy, however, the advocates of reform in the core OECD countries have less to show, though in each case there have been some notable moves towards liberalisation.

Agriculture

One of the three is agriculture.  Here useful indicators of the extent of interventionism are the "producer subsidy equivalents" (PSEs) which are measures of support computed annually by the OECD Secretariat for both products and countries.  Broadly, the past two decades fall into two sub-periods.  In the first, from the late 1970s to the mid-to-late 1980s, the PSEs rose virtually everywhere.  As between the three-year periods 1979-81 and 1986-88, in the largest countries or country groupings, support as a percentage of the value of agricultural production rose from 14 to 30 for the US, from 20 to 42 for Canada, from 36 to 48 for the EU, and from 60 to 73 for Japan.  In 1987 came a turning point.  The then OECD governments formally agreed, in the Ministerial Council Communiqué of that year, that "a concerted reform of agricultural policies" should be implemented;  and among the principles that were listed as the basis for reform the first was that "The long-term objective is to allow market signals to influence ... the orientation of agricultural production". ⁽⁴⁴⁾  Since then the collective wish and intention to introduce reforms have been regularly reaffirmed -- most recently at the meeting of OECD agriculture ministers in March 1998 -- the more so following the GATT Uruguay Round Agreement on Agriculture of 1994 and because of continuing pressures on government budgets.  Some progress has been made in reducing overall support and shifting to less trade-distorting policy measures, but much remains to be done.  In recent years the percentage PSE has fallen in all member countries, from an average OECD level of 45 per cent in 1986-88 to 35 per cent in 1997;  but there have been only slight falls in the EU and Japan, while the milk, sugar and rice sectors appear as stubbornly resistant to attempts at fundamental reform.

Labour Markets

A central area of policy, where in many cases persisting high rates of unemployment give grounds for concern, is that of labour markets.  Here a 1998 OECD review of developments gives a generally favourable account of the recent evolution of policies, and notes that over the 1990s estimated "structural" (as opposed to "cyclical") unemployment rates have moved down in several countries -- Denmark, the Netherlands, Ireland, the UK, Australia and New Zealand. ⁽⁴⁵⁾  Viewing the period as a whole, however, only two of the core OECD countries, the UK through a series of legislative reforms over the period since 1980, and New Zealand chiefly as a result of the Employment Contracts Act of 1991, appear as radical reformers.  Among Continental European countries, the Netherlands alone "pursued a comprehensive reform programme starting in the first half of the 1980s". ⁽⁴⁶⁾  Elsewhere in this group, generally speaking, prevailing and highly regulated systems have been subject only to changes at the margin.  Over the years the changes have been numerous, and in many cases their effect has been to widen the scope for markets -- for example, by relaxing restrictions on part-time working.  But it would not be difficult to compile a list of measures or decisions which went in the opposite direction:  leading examples from recent years are the harmonising of wage levels in East and West Germany following unification -- an outstanding case where imposed uniformity has brought economic disintegration within a country -- and the recent introduction in France of a statutory 35-hour week as from the year 2000.  In Australia, a centralised system of wage determination has so far been subjected to only modest reforms.  In the US, a system which is notably freer than those of other core OECD countries may on balance have become more regulated in recent years, in part through new legislation but also as a result of court rulings which have undermined the freedom of employers to terminate contracts of employment. ⁽⁴⁷⁾

In this context, concerns about growing over-regulation appear well-based.  As Richard Epstein has written:

Worldwide, the regulation of labor markets has created a legal edifice of stunning complexity.  Protective laws abound on every conceivable aspect of the subject:  health, safety, wages, pensions, unionisation, hiring, promotion, dismissal, leave, retirement, discrimination, access and disability.  The multiple systems of regulation now in place often work at cross purposes with each other. ⁽⁴⁸⁾

It may be that for most of the core OECD countries, if one takes account of the whole range of labour market regulations including in particular anti-discrimination laws, the prevailing tendency over the period as a whole has been to move the system further away from liberal norms. ⁽⁴⁹⁾

Public Spending

Finally, a central issue remains that of curbing high levels of public spending.  Some evidence on changes in the ratio of general government expenditure to GDP over the period from 1970 to 1996 is presented in Table 4, which gives data for 13 core OECD countries including all the largest economies which form the G7 group.  For 11 of these countries, for which the data go back to 1970, the ratios for that year ranged from 19 per cent in the case of Japan to almost 43 per cent in the case of Sweden, with an unweighted average of just over 34 per cent.  For 1996, the corresponding average was 15 percentage points higher, at over 49 per cent.  The lowest ratio, which had now become that of the US rather than Japan, was close to 33 per cent, while the highest of all, for Sweden again, had risen to over 64 per cent.  In terms of percentage points rounded off, the increases for individual countries, over these 26 years, range from three points for the US to 22 points for Spain.  Only for two of these countries besides the US (the UK and the Netherlands) has the increase in the ratio over the whole 26-year period been held below 10 percentage points.

Table 4:  Public Expenditure Ratios, 1970-96, for 13 Core OECD Countries, Selected Years

	1970	1973	1975	1983	1989	1993	1996
US	30.0	29.1	32.8	33.4	31.9	33.8	32.7
Japan	19.0	21.9	26.8	33.3	30.6	33.7	36.2
Germany	38.3	41.1	48.4	47.8	44.8	49.5	48.8
France	38.5	38.3	43.4	51.4	49.1	55.0	54.8
Italy	33.0	36.6	41.5	48.9	51.4	57.4	52.7
UK	36.7	38.0	44.4	44.7	37.6	43.6	41.8
Canada	33.5	34.0	38.5	45.3	43.1	49.4	44.7
G7 total	30.3	31.1	35.8	38.6	36.6	40.2	39.3
Australia	..	25.5	31.4	35.0	33.0	37.3	36.4
Belgium	41.8	45.4	50.7	63.1	53.6	56.1	53.0
Ireland	..	..	..	51.9	38.7	40.8	36.6
Netherlands	41.3	43.4	50.2	59.8	53.9	55.1	49.6
Spain	21.6	22.3	24.3	37.7	40.9	47.6	43.6
Sweden	42.8	44.3	48.4	64.5	58.3	71.0	64.3

Note:  Figures are for general government total outlay as a percentage of nominal GDP.

Source:  OECD Secretariat.

In looking at these longer-term changes, however, much depends on the choice of periods for comparison.  This can be seen in the case of the G7 countries over the period from 1973 to 1996.  In 1973, the public expenditure ratio for the group as a whole was 31.1 per cent, while for 1996 it was 39.3 per cent:  hence the increase over the whole 23 years comes to 8.2 percentage points.  But the opening two-year period, 1973-75, accounts for over half this total increase -- 4.7 points, as compared with only 3.5 points for the remaining 21 years;  and as between 1983 and 1996, there is only a slight increase.  In the British case, the ratio actually fell as between 1975 and 1996, following an increase of 6.4 percentage points in the preceding two years.

For all 12 countries for which data for the entire period from 1973 are shown in the table, the public expenditure ratio rose in 1973-75.  For all but one of these countries, Germany, there were further increases over the period 1975-83, which in some cases were substantial -- for Sweden, there was a rise of 16 percentage points.

As from the early 1980s, however, for some of the core OECD countries, the rising trend has been halted or reversed.  Over the period 1983-96, three of these in particular -- Ireland, Belgium and the Netherlands -- show very large reductions in the ratio. ⁽⁵⁰⁾  This is true also of the UK, where the figure was brought down substantially during the phase of rapid economic growth between 1983 and 1989.  Here, however, there was an increase again over the ensuing four years, so that over the whole period 1983-96 there is only a modest fall, of 2.5 percentage points.

Until recently at any rate, these four cases were not representative of the group.  In 14 other core OECD countries for which there are comparable published figures from the early 1980s, there were further increases in the ratio, which in some cases were considerable, as between 1983 and 1993.  Since then, however, a change has occurred:  the ratio has been brought down in all but one of these 18 countries, the exception being Japan. ⁽⁵¹⁾  In three cases -- Norway, the Netherlands and Sweden -- the reduction exceeds five percentage points, while in four others -- Canada, Greece, Ireland and Italy -- it lies between four and five points.

The long-term tendency for the growth of public spending to outrun the growth of GDP was not long ago made the focal point of a survey article in The Economist by Clive Crook, in which the conclusion is drawn that -- to quote the cover headline for The Economist that week -- "big government is still in charge". ⁽⁵²⁾  On the evidence shown here, this verdict appears broadly correct but too unqualified.  It is true that, despite the various efforts made and any number of good resolutions, few of the core OECD countries have as yet achieved reductions in the ratio of public spending to GDP which are both substantial and clearly more than temporary, and that these exceptions do not as yet include any of the G7 group.  On the other hand, it may yet prove, for some at least of the remaining majority, that a turning point was reached in the early 1990s, after which the growth of the public sector was effectively restrained.

Largely with a view to containing public expenditure, governments in all the core OECD countries have been trying, no doubt with varying success, to raise the effectiveness of public sector operations.  This has been reflected in "a range of management reforms including more extensive use of market-oriented approaches to resource allocation and service provision;  greater managerial flexibility;  and systematic rationalisation of government regulation". ⁽⁵³⁾  A notable feature has been the opening up of public procurement, and the public provision of goods and services, to competition from private businesses.  For the UK, indeed -- and the same might be said for New Zealand -- these reforms can be viewed, in conjunction with privatisation, as having embodied an ambitious strategy to reorder the working of public administration and government:  this is the theme of an interesting recent study of the British case by Sir Christopher Foster and Francis Plowden. ⁽⁵⁴⁾  However, it would not be correct, even for Britain, to identify the economic reforms of the past two decades with what these authors term "the new public management", since this would leave out of account the extensive liberalisation that has gone ahead in other areas of policy -- most notably, in relation to international transactions.

Developing Countries

In the developing world, it is in relation to external economic policies that the most striking changes have occurred:  in a growing number of cases, both the policies themselves and the received ideas that bear on them have become more liberal.  Here again, Chile appears as the first of the reformers, well before the close of the 1970s; ⁽⁵⁵⁾  and in China, the process of opening the economy to foreign trade and direct investment goes back to the early days of reform.  But it was later, from around the mid-1980s, that the process of external liberalisation gathered momentum among the developing countries more generally.  As to actions, this was reflected in a variety of unilateral measures to liberalise trade régimes, most conspicuously in East Asia and Latin America, and to remove restrictions and prohibitions on inward direct investment. ⁽⁵⁶⁾  As to attitudes and philosophy, there was a growing recognition that the prosperity of developing countries did not depend on securing a range of unreciprocated favours from the rich countries, and could be increased by a general reduction in trade barriers:  a striking indication of this change of heart has been the growing membership of, and a fuller participation in, what was the GATT and is now the WTO.  This new orientation on the part of an increasing number of developing countries has affected the whole climate of international trade relations:  it helped to make possible the launching of the Uruguay Round in 1986, ⁽⁵⁷⁾ and it has improved the prospects for further liberalisation in the international system as a whole, both of trade and of foreign direct investment.

A second notable aspect of reform in the developing countries has been the spread of privatisation.  Here the earliest substantial programme, the first of a series, was adopted in Chile during the mid-1970s.  Over the past 10 to 15 years there have been major developments in Latin American countries, with Argentina, Chile and Mexico as the leading instances, and in a number of East Asian countries including South Korea and Malaysia.  Even in India some first steps in this direction have been taken:  an interesting case, where the initiative has come from a State government, is privatisation of electricity supply in Orissa.  Admittedly, the extent to which privatisation has been taken in the group as a whole is still limited:  a recent World Bank report notes that

the state enterprise sector has diminished only in the former socialist economies and in a few middle-income countries.  In most developing countries, particularly the poorest, bureaucrats run as much of the economy as ever. ⁽⁵⁸⁾

All the same, a new chapter in the evolution of economic policies has been opened in a growing number of developing countries, including most of the larger economies among them.

It is not only through privatising state enterprises that the scope for private initiative has been enlarged.  China is a notable example where

There has been no formal reversion to capitalist property rights through privatisation of state property, but de facto, peasants have substantially regained control of their land, private house ownership is growing rapidly, and there is substantial scope for individual enrichment through private and quasi-private entrepreneurship. ⁽⁵⁹⁾

In Chinese agriculture, collectivised production has virtually disappeared, and even though land is not privately owned the whole system has been opened up, in particular through long-term leasing arrangements, so as to give far more scope to markets and private initiative.  In industry, recently-published Chinese official data, quoted by Maddison, show the proportion of gross industrial output contributed by state-owned enterprises in 1996 as just under 40 per cent, as compared with almost 78 per cent in 1978.  In India, as part of the process of reform which was set in motion in 1991, the licensing requirement for industrial investments has been substantially removed, while the list of industries reserved for public sector enterprises has been reduced.  In many countries, the scope has been widened for private businesses, often foreign-owned, to participate in investment or mineral exploration projects through joint ventures or some form of joint financing.

The Former Communist World

A third category of reforming countries emerged, as from the end of the 1980s, with the collapse of communism in Central and Eastern Europe and the former Soviet Union.  In all these countries, the downfall and discrediting of the Soviet system may have opened the way to the eventual establishment of market economies.  It is true that the extent of liberalisation has up to now been variable across countries and uneven within them, while in a good many cases there is as yet little to show.  But for several of the group -- the Czech Republic, Estonia, Hungary, Lithuania, Poland, Slovenia -- the transition to a Western-type system is clearly in course of realisation, and in many if not most others some important steps have been taken while the general direction of change has been largely accepted.  In Russia, the largest economy within the group, substantial reforms were introduced in the early 1990s:  one verdict on these is that "there can be no doubt that the reforms which began with Gaidar's price liberalisation in January 1992, and continued with Chubais's mass privatisation ... have led to the emergence of a genuine market economy". ⁽⁶⁰⁾  More recently, as events during 1998 have shown all too clearly, progress has not been well sustained, while the current economic and political crisis has put in question, among other things, the future of reform and possibly even the general direction of policy.  All the same, substantial and possibly decisive changes have been made over the 1990s, while up to now the reformist orientation of official policies has not been abandoned or repudiated.

As in the other two country groupings, external liberalisation has been a leading element in the reform programmes in Central and Eastern Europe and the former Soviet Union.  In a survey of the transition process, Peter Murrell has noted that

Within just a few years, three-quarters of [these] countries abandoned centrally managed trade, removed most quantitative restrictions, reduced tariffs to fairly low levels and adopted essentially full convertibility on current account.

More broadly, in the same article, the author concludes that "Taken as a whole, this is the most dramatic episode of economic liberalisation in economic history". ⁽⁶¹⁾  The full significance of these developments does not emerge from the dry statistical indicators of Table 3 above, which give no hint that the changes in orientation thus recorded mark the end of an era.  The collapse of communism has discredited a hugely influential vision of the future of humanity, together with the prolonged and calamitous giant exercise in social engineering that was based on it.

Convergence

One of the features and results of liberalisation and its spread across the world is that the differences between economic systems and prevailing economic philosophies in the three groups of countries have become increasingly less pronounced.  In all three, there have been reforms of a broadly similar kind, introduced for much the same reasons;  and in particular, both privatisation and the liberalisation of cross-border transactions have become accepted and been carried into effect to a surprising extent.  As to ways of thinking, there is now no serious support in the world for the idea of a fully socialist economy, and general agreement that many of the former boundaries between central direction and individual choice had to be redrawn.  In both the developing countries and the former communist countries, there is now a much greater sense of belonging to the same world, the same universe of discourse, as the core OECD countries which until recently were officially viewed either as rival systems or as agents of dominance and deprivation.

This convergence in thinking and policies helps to account for the trend towards closer international economic integration which has been a notable feature of these years, and which deserves a heading of its own.

THE EVOLVING INTERNATIONAL ECONOMIC SYSTEM:  "GLOBALISATION" AND ITS EFFECTS

Commentators are apt to tell us that We Stand at the Dawn of a New Era.  One present-day variant of this attention-arousing message is that the world economy has been transformed in recent years by a process of "globalisation".  According to the purest versions of this brand of DNE thinking, globalisation is a recent and dramatic development, largely independent of the wishes and intentions of governments;  and it is already virtually complete, so that the world economy is now close to being a single borderless entity in which national states no longer have the power to decide economic policies for themselves.  In the context of recent economic reforms and their significance, it is worth noting that all of this is misleading or false. ⁽⁶²⁾

So far from being a new development, the trend towards closer cross-border integration has been clearly in evidence over the past half-century, and can indeed be traced back at any rate to the years following the end of the Napoleonic Wars.  Evidence for this can be seen in Table 5, which shows comparative annual average growth rates for world output and the volume of world exports in each of six periods spanning the years 1820-1996.  In the table there is only one time-phase, from 1913 to 1950, in which export growth fell short of output growth;  and here exceptional factors were at work, in the form of two world wars and the Great Depression of the 1930s.  In these six periods, the ratio of export growth to output growth, which is one indicator of the speed with which integration was going ahead, appears as highest for the half-century to 1870, while the growth rate of world exports was appreciably higher, both absolutely and relatively, in the period 1950-73 than in 1973-92 (since when it has risen again).  It is not at all the case, therefore, at any rate for merchandise trade, that the past 10-15 years have brought a new and unprecedented era of globalisation.

Table 5:  Growth Rates of World Output and Exports, 1820-1997
(average annual compound percentage rates of growth)

	1820-70	1870-1913	1913-50	1950-73	1973-92	1992-97
Output	1.0	2.1	1.9	4.9	3.0	3.7
Exports	4.2	3.4	1.3	7.0	4.0	8.1

Sources:  For 1820-1992, Maddison, Monitoring the World Economy.
For 1992-97, IMF World Economic Outlook.
The final figure in the table relates to world merchandise trade rather than world exports.

Over these past two decades, as before, international economic integration has moved forward in response to two main interrelated factors, technical and political.  Some recent technical changes, such as the further development of air freight and (still more) advances in information technology, have promoted integration by reducing the relative cost of cross-border transactions.  Besides their direct impact, these have been one influence among many on external economic policies:  they have made governments more favourably disposed to external liberalisation or less able to resist it.  However, there is nothing new in this:  the 19th century had its counterparts -- most notably, perhaps, in the establishment of international cable communication.  In any case, the main single factor has been, and still remains, the political one.  Historically, it is national governments that have largely decided how far their economies should be open to flows of trade, capital and migrants, and this is still the case.  Globalisation is sometimes presented as a kind of economic tidal wave, an inexorable force which is sweeping governments, businesses and peoples before it.  There is an element of truth in this, but the picture is often overdrawn.  Now as earlier, the story of international economic integration -- and disintegration also -- is predominantly one of the changing external policies of national sovereign states.

Clear evidence of this, for the years since the end of the Second World War, is to be seen in the wide differences that emerged among countries with respect to the relationship between trade growth and output growth.  Within the core OECD countries, for example, Maddison's constant-price series shows for Australia in 1950 a ratio of exports to GDP of 9.1 per cent, while the corresponding figure for the Netherlands, an economy of much the same size in terms of population and GDP, was not much higher, at 12.5 per cent.  By 1973 the respective ratios had become 11.2 per cent and 41.7 per cent.  This striking divergence occurred chiefly because governments in the Netherlands chose to introduce substantial trade liberalisation -- in the Marshall Plan agreements, as a result of EC membership, and through participation in the GATT rounds -- whereas their Australian counterparts did not.  Among developing countries, there is a similar conspicuous contrast, from the 1950s onward, between countries such as South Korea and Taiwan on the one hand, where the system was made more open to trade, and the more typical cases, with India as an outstanding example, where it was kept relatively closed.  In every country, the character and evolution of the trade régime was largely a matter of deliberate choice.

That is still the case today.  There remain wide differences in the extent to which different national economies are open to trade and capital flows.  Not only these continuing differences, but also the various recent measures of trade liberalisation noted above, whether national, regional or multilateral, have reflected the wishes and decisions of the individual governments concerned.

The same is true for flows of foreign direct investment (FDI) as distinct from trade.  Here growth has been more focused on the past 20 years or so, over which, though with much larger year-to-year variations, it has exceeded that of world trade.  A recent estimate suggests that over the decade from 1986 to 1996 world inflows of FDI increased in real terms by a factor of more than four and one-half.  By contrast, the volume of world trade over the same period approximately doubled. ⁽⁶³⁾  A strong impulse to cross-border links and operations on the part of businesses has come from developments in products, markets and (especially) communications and management systems which have increased the advantages of operating globally.  But here also the main causal factor has probably been changes in official policies, through privatisation and industry deregulation, which have opened up new possibilities for firms to operate across national boundaries, and by the freeing of investment flows, inward and outward, from prohibitions and restrictions. ⁽⁶⁴⁾  Although these changes were influenced by outside events, they were not forced on the governments concerned.

Limits to Integration

One variant of DNE globalism is that the collapse of Soviet communism, either alone or in conjunction with external liberalisation on the part of developing countries, has transformed the world economy.  Thus John Gray has recently argued that "By removing from the world any alternative economic system, the Soviet debacle allowed a truly global capitalism to develop, the destructive consequences of which are prefigured in Marx's thought";  and on the same lines, though including the developing countries also (and with no hint as to supposed "destructive consequences"), Jeffrey Sachs has written that

In the last ten years, arguably in the last twenty years, a truly global market-based system has taken shape at blinding speed ... a system that twenty years ago was typically portrayed as a world structure of competing systems ... has suddenly become a single integrated world ... ⁽⁶⁵⁾

Both statements, and others of the same genre, overstate the extent to which policy reforms in these countries, as distinct from other forces at work, have in these last few years given rise to closer international economic integration.  Not surprisingly, none of the newly-reforming economies has moved to a wholly liberal trade and investment régime;  even had they done so, the full effects would have been less immediate than implied here;  and even these full effects would be one influence only on the progress of integration, which also depends (and to a greater extent) on what happens in the core OECD countries which still account for some 60 per cent of world output and a higher proportion of both international trade and foreign direct investment.  The "Soviet debacle" was a truly historic event, but it did not in itself, and virtually overnight, create a new and fully global economic system.

Although the various measures taken to liberalise trade and capital flows over the past two decades have been far-reaching, and have extended to a much wider range of countries than at any earlier stage in the past half-century, they have by no means brought about a fully integrated world economy, nor is such a "borderless world" even remotely in prospect.  With respect to both trade and capital flows, substantial restrictions remain in place almost everywhere.  For the OECD countries, the most conspicuous of these are the numerous forms of selective trade protectionism that still prevail -- most notably, in agriculture, textiles and clothing, steel, automobiles, and semi-conductors;  with respect to many if not most services;  in government procurement practices;  in the application of the complex rules of origin that have become more pervasive as a result of the spread of regional integration agreements;  and through actions, and the threat of actions, under anti-dumping legislation.  At the same time, as the chequered fortunes of the proposed OECD Multilateral Agreement on Investment have recently shown, many OECD governments are reluctant to remove their remaining restrictions on inward direct investment.  In most developing countries, levels of protection remain higher than in the OECD group;  and despite the spread of more liberal ideas and practices in recent years, the hold of "insulationist" conceptions of both international trade relations and direct foreign investment remains strong.  In every country, except where regional integration agreements apply, international migration remains strictly controlled, and in some cases, such as Australia and New Zealand, the recent tendency has been towards closer restrictions on entry. ⁽⁶⁶⁾  None of these forms of restriction, most of them highly illiberal, is in course of being washed away by a tide of events which governments are powerless to affect.

Have Governments Lost the Power to Act?

It is often maintained today that full freedom of international capital flows, with the breakdown or abolition of exchange controls and the greater cross-border mobility of direct investment by multinational firms, now places new and much stricter limits on the freedom of action of governments.  Up to a point this is true, probably increasingly so.  In any case, the purpose and effect of external liberalisation, of trade as well as of capital flows, is to limit the autonomy of national governments, albeit in ways that they themselves have chosen to accept and which -- as history shows -- are not necessarily binding for ever.  At the same time, the argument is often overdone. ⁽⁶⁷⁾  In particular, it is misleading to suggest that power has been passing from governments to markets, and hence -- as a result of their increasing prominence in these markets -- to multinational firms.  Generally speaking, market outcomes do not reflect the exercise of power -- all the less so if, as a direct result of the liberalisation of trade and direct investment flows, the markets in question are made more competitive.  In so far as governments relax or relinquish coercive powers, the strong probability is that the exercise of power as such has correspondingly less influence on events:  it is not the case that at any given time there is a fixed quota of power in the system which has to find an outlet somewhere.  As Hayek has rightly said in relation to longer-run historical evolution, within and across national frontiers, the development of a market order has in fact brought with it "the greatest reduction of arbitrary power ever achieved". ⁽⁶⁸⁾

More generally, it is a mistake to suppose either that the power to regulate international transactions effectively insulates government policies from outside influences, or that a liberal trade and payments régime prevents the exercise of effective sovereignty.  Both points are well illustrated by British economic history.  On the one hand, the experience of the United Kingdom right through the three decades after the Second World War demonstrates that economies where trade and payments are heavily controlled may be subject none the less to continuing external problems and crises.  At the other end of the spectrum of policies, the UK during the period from 1850 to 1914 maintained virtually full freedom not only of trade and capital flows but also of migration, within an international system which was itself arguably more liberal than that of today, yet its sovereignty and freedom of action were not undermined as a result.  As to today's situation, even in the highly unlikely event that an economically borderless world came to pass, the separate identity of national states, and their central political role, might well remain largely unaffected:  these states, if they chose, could continue to run their own affairs in such matters as defence, foreign policy, constitutional arrangements, legal systems, cultural affairs, education, residence, citizenship, voting rights, and the status of the national language, as well as retaining a measure of fiscal autonomy.  Meanwhile, national freedom of action with respect to economic policies, including the freedom, as now, to maintain (or even restore) a wide variety of restrictions on international trade and investment, has been reduced but by no means brought to an end by recent developments.  It may be that international mobility of capital in particular will increasingly tie the hands of national governments, and even undermine the rationale for their activities, ⁽⁶⁹⁾ but such a trend still has a long way to go.

What Is New and What Is Not

Hence much of what is currently said or assumed about "globalisation" has to be treated with reserve or disbelief.  This however is not to belittle the liberalisation that has taken place over these past 20 years, and which has given renewed and often unexpected impetus to cross-border economic integration.  To argue that this recent trend towards a more integrated world economy has been neither sudden nor novel, that it mainly results from policy decisions rather than impersonal and uncontrollable forces, that it has neither deprived governments of the power to frame economic policies nor undermined the role of national states, and that despite it the world economy is still a long way from full integration, is not to dismiss it as unimportant.  Not only has the liberalisation of trade and capital flows been taken further during these years than previous history would have suggested was possible, but in a large number of countries, whose economies had been largely closed and whose governments had consistently rejected the liberal conception of an international economic order, what may prove an historic change in policies has been made.

SUMMING UP:  DEVELOPMENTS OVER TWENTY YEARS

In the assessment that Milton and Rose Friedman have made of long-term trends in the United States there is a positive and a negative side.  In the world of actual events, they consider that on balance the cause of economic freedom has lost ground.  On the other hand, they take a more favourable view of the evolution of ideas and opinions:  "Judged by ideas, we have been on the winning side ... We are in the mainstream of thought, not as we were 50 years ago, members of a derided minority". (above, p. viii).

These judgements relate to the course of change in the US over half a century, whereas my concern here is with the world as a whole in the past two decades.  Because of these differences in perspective, my assessment is rather different from that of the Friedmans:  it is more positive with respect to the march of events, but more equivocal when it comes to the evolution of ideas and perceptions.  In this latter area, there is no doubt that liberalism has made significant gains;  but as will be seen below, I think it is too soon to declare a victory.  This largely explains why I view the trend to freer economic systems as uneasy rather than assured.

In the realm of events, the choice of the time interval for comparison is decisive.  Even for the US, there is good reason to think that on balance the fortunes of economic liberalism have improved over these past two decades, and the evidence suggests that this is true also of the great majority of countries in the world.  If we draw a line in 1998, and look back just 20 years or so but no further, the broad direction of change is evident.  This is notably true with respect to privatisation and the freeing of international transactions.

Of course, there is room for argument as to the significance of these developments.  One has to ask whether the shift that has occurred in the orientation of policies is likely to prove lasting -- whether the concrete gains made by liberalism over this period will be consolidated, further extended, or put under threat by interventionist revivals in many if not most countries.

This central issue remains to be decided.  However, the past already gives grounds for thinking that the recent trend towards enlarging the domain of economic freedom is more than transient and incidental.  To judge from the freedom ratings quoted above, which are consistent with other evidence, there are few countries if any in which, over this period, the direction of change, once explicitly set on a reforming course, has as yet been deliberately and consciously reversed.  Admittedly, this gives no guarantees for the future;  and it may be that in some cases, such as Russia and Malaysia, recent interventionist moves will prove to have been the first manifestations of such a reversal.  Even so, the record of the past 20 years suggests that the improvement in the fortunes of economic liberalism is more than an accident of fashion or an over-reaction to passing events.

To probe this notion further, we have to go behind the record of events, and consider what has made the improvement possible.

---

ENDNOTES

25.  James Gwartney and Robert Lawson, Economic Freedom of the World 1997:  Annual Report, Vancouver, BC:  Fraser Institute, 1997.

26.  A brief review of the ratings and their significance is given in the Annex to this Paper.

27.  The country excluded is Hong Kong.  This consistently receives the highest rating which remains unchanged throughout the period.  Hence the series is trendless;  but even so, it would be misleading to classify so liberal a régime among the nonreformers.

28.  Angus Maddison, Monitoring the World Economy, 1820-1992, Paris:  OECD Development Centre, 1995.

29.  However, a recent publication from the International Monetary Fund suggests that as a result of recent policy changes two countries from this intermediate category, Benin and Cote d'Ivoire, can now be included among the reformers.  (S. Fischer, E. Hernandez-Cata and M.S. Khan, Africa:  Is This the Turning Point?, Washington, DC:  International Monetary Fund, 1998.)

30.  For Russia, the GDP figure is taken from Maddison's "The Nature and Functioning of European Capitalism:  A Historical and Comparative Perspective", published by the Groningen Growth and Development Centre, 1997.

31.  A third possible comparison would be to take direct proportionate changes in the ratings.  This would yield a quite different set of rankings, in which a low initial starting point, other things being equal, gave countries a higher rather than a lower comparative figure.  For example, in the case of the two countries just referred to, the increase for Portugal would then be 136 per cent, as compared with 67.5 per cent for South Korea.

32.  This is both a narrower and a wider range than that of the "Economic Freedom of the World" study -- narrower, in that the study covers also macro-economic policies in each country and the extent to which inflation has been curbed, but wider, in that it does not as yet include developments in labour markets and does not cover the agriculture or energy sectors as such.

33.  The following summary draws in particular on a range of OECD reports, including country economic surveys, many of which are not quoted directly or cited.

34.  OECD, Assessing Structural Reform:  Lessons for the Future, Paris:  OECD, 1994, p. 9.

35.  OECD, Report on Regulatory Reform:  Synthesis, Paris:  OECD, 1997, p.7.

36.  John B. Taylor, "Changes in American Economic Policy in the 1980s:  Watershed or Pendulum Swing?", Journal of Economic Literature, Vol. XXXIII, No. 2, June 1995, p.782.  The book under review was Martin Feldstein (ed.), American Economic Policy in the 1980s, University of Chicago Press, 1994.

37.  It is true that, in a White Paper issued in November 1996, the then British government formally endorsed the goal of global free trade by 2020 (Foreign and Commonwealth Office and Department of Trade and Industry, Free Trade and Foreign Policy:  A Global Vision, London:  Stationery Office, 1996).  However, a different government has since come into office, and in any case the external trade régime of the UK has long been, with a few residual qualifications, the régime of the European Community as a whole.

38.  This was the judgement of a WTO Secretariat study published a few years ago:  "To a much greater extent than is often acknowledged, regional and multilateral integration initiatives are complements rather than alternatives in the pursuit of more open trade." (Regionalism and the World Trading System, Geneva:  WTO, 1995, p.3.)

39.  John Jackson, "The World Trade Organisation:  Watershed Innovation or Cautious Small Step Forward?", in Sven Arndt and Chris Milner (eds.), The World Economy:  Global Trade Policy 1995, Oxford:  Blackwell, 1995, p. 24.  A recent set of studies relating to the agency is contained in Anne O. Krueger (ed.), The WTO as an International Organisation, Chicago:  University of Chicago Press, 1998.

40.  The first statement is "1977 IEA Principles for Energy Policy", and the second "1993 IEA Shared Goals".  Both are to be found, side by side, in Richard Scott, IEA:  The First 20 Years, Vol. Two:  Major Policies and Actions, Paris:  OECD/IEA, 1995, pp. 381-87.

41.  International Energy Agency, The Role of IEA Governments in Energy, Paris, 1992, pp. 9-10.

42.  The quotation is from Chapter 5 of OECD, Economies in Transition:  Structural Adjustment in OECD Countries, Paris, 1989, p. 209.  The author of this chapter was Robert Price.

43.  The main developments were recently summarised in the OECD's Economic Outlook 63, Paris, 1998, pp. 157-70.

44.  The relevant section of the 1987 Communique is quoted in OECD, Agricultural Policies, Markets and Trade in OECD Countries:  Monitoring and Evaluation 1998, Paris, 1998, and the annual OECD Monitoring reports are the source of the figures given in the text.  The Communiqué wording just quoted may seem innocuous, but it was agreed to only with great difficulty and marked a significant change in official attitudes and goals.

45.  OECD, Economic Outlook 63, pp. 171-78.

46.  OECD, Implementing the Jobs Strategy:  Member Countries' Experience, Paris, 1997, p.12.

47.  Cf. David R. Henderson, "The Europeanisation of the U.S. Labor Market", Public Interest, No. 113, 1993.

48.  Richard Epstein, Simple Rules for a Complex World, Cambridge, MA:  Harvard University Press, 1995, p. 151.

49.  Anti-discrimination laws in the US are the subject of Richard Epstein's study, Forbidden Grounds:  The Case against Employment Discrimination Laws, Cambridge, MA:  Harvard University Press, 1992.

50.  As from a later date, New Zealand also comes into this reforming category:  it is omitted from Table 4 because fully comparable data are lacking.

51.  The information in this paragraph is taken from OECD, Economic Outlook 63, Paris, 1998, Annex Table 28.  This table shows annual series for 21 "core" OECD countries (as also for Korea), but here I have omitted Iceland on grounds of size and Denmark and New Zealand because the figures relating to them are not fully comparable with the rest.  This explains the figure of 18 countries referred to here.

52.  Clive Crook, "The Future of the State", The Economist, 20-26 September 1997.

53.  OECD, Assessing Structural Reform, op. cit., p.10.

54.  Christopher D. Foster and Francis J. Plowden, The State under Stress, Buckingham:  Open University Press, 1996.  The study raises important administrative and political issues which are not considered here.

55.  "Between 1974 and 1979 Chile was transformed from a highly closed economy, where international transactions were severely repressed, into an open economy." (Sebastian Edwards and Alejandra Cox Edwards, Monetarism and Liberalisation:  The Chilean Experiment, Cambridge, MA:  Ballinger, 1987, p. 109.)

56.  John Dunning, in a paper published in 1995, noted that "In the last five years alone ... over eighty countries have liberalised their policies towards inward FDI".  (John H. Dunning, "The Role of Foreign Direct Investment in a Globalising Economy", BNL Quarterly Review, No. 193, June 1995.)  The majority of these would be developing countries, though no doubt the list included members of the third of the groups distinguished here, the former communist countries.  A recent OECD study summarises the evolution of policies towards FDI in six "emerging economies" - Argentina, Brazil, Chile, Indonesia, Malaysia and the Philippines -- all of which "are converging on a more open approach".  (Foreign Direct Investment and Economic Development:  Lessons from Six Emerging Economies, Paris:  OECD, 1998, p. 8.  The author of the study is Stephen Thomsen.)

57.  John Croome, in his book Reshaping the World Trade System:  A History of the Uruguay Round (Geneva:  WTO, 1995), records that in the mid-1985 meeting of the GATT Council there was strong opposition to the idea of a new trade round from a group of 24 "hardline" developing countries.  By the following spring, however, the 24 had been reduced to 10 only, and soon afterwards Argentina became another defector.

58.  World Bank, World Development Indicators, Washington, DC, 1997, p. 247.  For the petroleum industry, Morris Adelman holds that "most of the world's oil is still produced by flabby national dinosaurs" -- though even here, there has been privatisation, as in the UK and more recently Argentina.  (Morris Adelman, The Genie out of the Bottle:  World Oil since 1970, Cambridge, MA:  MIT Press, 1995, p. 8.)

59.  Maddison, Chinese Economic Performance in the Long Run, op. cit., p. 61.

60.  The quotation is from Brigitte Granville, The Success of Russian Economic Reforms, London:  Royal Institute of International Affairs (International Economics Programme), 1995, p. 105.  More recently, the same broad assessment was made by Anders Aslund:  "Today, Russia has become a market economy, with dominant private ownership, though it is a rather distorted market economy." (Anders Aslund (ed.), Russia's Economic Transformation in the 1990s, London:  Pinter, 1997, p. 188.)

61.  Peter Murrell, "How Far Has the Transition Progressed?", Journal of Economic Perspectives, Vol. 10, No. 2, Spring 1996, p. 31.

62.  A prominent "international dawnist" author is Kenichi Ohmae, who has written a book called The Borderless World (New York:  HarperCollins, 1990) and another called The End of the Nation State (London:  HarperCollins, 1995).  Both titles carry exaggeration to the point of fantasy.

63.  For FDI flows, the figure here is taken from the UN World Investment Report for 1997, which has a table (p. 269) showing year-by-year growth rates of world FDI inflows in both nominal and real terms.  The figure for the growth in world trade is from IMF sources.

64.  Cf., for example, successive issues of the World Investment Report, as also the article cited above, by John H. Dunning.

65.  John Gray, "Hollow Triumph", The Times Literary Supplement, 8 May 1998, and Jeffrey Sachs, "Managing Global Capitalism", the David Finch Inaugural Lecture, University of Melbourne, 1997.

66.  The issue of international migration poses some difficult problems for economic liberals, not considered here.

67.  The main issues here were well reviewed in a survey article on "The World Economy", written by Pam Woodall and published in The Economist, 7 October 1995.

68.  F.A. Hayek, Law, Legislation and Liberty, Vol. 2:  The Mirage of Social Justice, London:  Routledge & Kegan Paul, 1976, p.99.  The idea that power is passing from national states to multinational firms is one of the main themes of Susan Strange's recent book, The Retreat of the State:  The Diffusion of Power in the World Economy, Cambridge:  Cambridge University Press, 1998.  Her argument, however, rests on a highly questionable conception of power in which it is "gauged by influence over outcomes" (p. 53).  So broad a definition blurs the critical distinction between the exercise of coercion, whether by states or other agencies, and those influences on events which do not restrict freedom of choice.

69.  This is a leading theme of Richard B. McKenzie and Dwight R. Lee, Quicksilver Capital:  How the Rapid Movement of Wealth Has Changed the World, New York:  The Free Press, 1991.