Thursday, August 29, 2019

Brexit and the Failure of Neo-Liberal Economics

Photo by Christoph Scholz
One of the key themes which serves as the source of most of the undercurrent of discontent for leave voters is neo-liberal economics. The adoption of neo-liberal principles by the UK from Thatcher in the 1980s has divided the UK as much as it has progressed the country. The outcome of this is that the frustrations of those negatively affected has been built up over decades and been released in the form of Brexit, primarily on the grounds of immigration. In this blog, I will argue that a combination of the ignored factor of neo-liberal economics as well as opinions on immigration culminated in creating Brexit.

The beginning of the UK’s shift towards neo-liberal economics can be linked back to Thatcher’s reign. It was during Thatcher’s first premiership under the influence of neo-liberal principles provided by Friedman and Krugman, that Thatcher induced privatisation of utilities and, more importantly, the deregulation of the financial markets. The deregulation of financial markets in 1986 led to the financial big bang, which saw the huge growth in activity in financial markets. While this can be seen as the origin of London’s stronghold as one of the major financial cities in the world, it was also a long-term trigger to the financial crisis that occurred in 2008. The deregulation of financial markets allowed financial institutions to have little observation and naturally saw a move to the creation of risky products and loans in order to push returns.

This is evidenced with the sub prime loans crisis in America, which saw the gifting of mortgages to people who could not afford them. This went even further with the creation of CDOs (Collateralised Debt Obligation), which was essentially debt being bundled up into products and sold on. This could occur due to the lack of regulation over the markets and the outcome was the financial crisis, in which millions lost their jobs and millions who were offered affordable mortgages found themselves in a situation where they could no longer afford them and had to move out or increase their debt. More importantly, the experience of the financial crisis, which was a product of neo-liberal economics, can then be redirected at the EU, who was seen not to do enough to protect UK. In addition, the outcome was years of austerity which forced cuts to the NHS, benefits and public services resulting in further discontent for leave voters who apportioned the blame to the EU rather than neo-liberal economics.

A further observation from the deregulation of financial markets is that it coincided with the structural decline of our manufacturing industry, specifically in the north of England. It is no surprise that majority of Leave’s votes came in the North East, Yorkshire and the North West as in Fig 1. What neo-liberal economics brought was the increase in competition from foreign competitors due to the founding principle of free trade and this saw the decline of the secondary sector as the UK’s competitiveness lied in its tertiary sector services. The real issue is that no transition mechanism was in place to help workers to deal with the displacement of their industry. This led to high levels of unemployment within manufacturing plus the low wages brought about from outside competition. This economic hardship, especially in the north, coincided with the growth in the south in services, which blossomed due to the hallmark of neo-liberalism: free movement of people and capital and free trade. Thus, anger and discontent grew in the UK, and Brexit could be seen as the product of the discontent, specifically as a revolt against the establishment.

With the rise of neo-liberalism in the 1980s and 1990s we started to see the rise of international neo-liberalism with the creation of supranational organisations such as WTO and the Maastricht Treaty in the EU. This increased further the level of mobility of capital and resources. Specifically, the growth of the EU coincided with growing inequality in the UK. The big bang in 2003 saw the inclusion of many eastern European countries into the EU, which started an inflow of immigration from such countries. The issue with immigration only became pertinent during the aftermath of the crisis, when austerity was implemented. Manysaw an influx of immigrants, while simultaneously facing stagnating wages, decreasing public services and increasing living costs. Whilst most of their hardship came from the crisis, they saw immigration – a product of neo-liberal economics, as the reason behind their economic hardship.

Their reaction was thus to target immigration, and they saw the EU as a main cause of immigration. Unsurprisingly, many voted for Brexit on the ground of controlling their borders. The rise of neo-liberal economics has brought divisiveness where there should have been hope. What neo-liberal economics showed is that without regulation, restraint or just plain moderation, it can be counter-productive and cause the opposite of one of its main aims – ever closer integration.

Daniel Oyebamiji

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