Without the 1990s, the 2020s Mess Would Have Arrived Much Earlier

It has become fashionable of late to condemn core economic developments the world underwent in the 1990s.  But in my view, we do so at our own peril. 

To be sure, the 1990s weren’t perfect but, despite certain downsides, they provided an important buffer that protected us for a long while against some of the bad trends we now have to contend with in the tumultuous 2020s.

Branko Milanovic, a lead critic

Branko Milanovic is a terrific economist.  His impressive work on changes in global income and inequality have set the terms of much of our modern debate on globalization.

In particular, his work has shown how globalization resulted in two distinct developments:  First, it allowed very many low- income earners in many countries around the world to escape poverty. 

And second, the burden of adjustment fell mainly on lower earners in the developed world who, while often not losing absolutely, were the big losers in relative income and wealth.[1] It is easy to conclude that their anger has been a powerful driver of resentment and populist politics.

A new emerging consensus

However, his recent perspective for The Globalist on the 1990s is unfortunately mostly wrong.[2] It deserves examining closely because the critical points he makes about that decade reflect a new emerging consensus.

That skeptical view of the prevailing mindset of the 1990s is then applied to many policy choices such as the move to EU enlargement, NATO expansion, the usefulness of the WTO and for some even the end of communism and the fall of the Iron Curtain.

Historians such as Gary Gerstle and recently Sven Beckert even made the case that it was only the existence of communism that enabled the attempts to civilize capitalism and defang its wild excesses.

The ex-post-facto rejection of the 1990s

Intriguingly, the rejection of the 1990s is as strong on the right as on the left.  For example, at the Munich Security Conference this year, U.S. Secretary of State Marco Rubio explained how the “euphoria” of that era “led us to make some terrible mistakes.”

There seems to be a bipartisan consensus on this one issue in the United States, although the country Is otherwise very split along partisan lines.

Not just in the U.S.

I am similarly amazed by the number of Poles on the left and on the right who today like to disparage Leszek Balcerowicz, the original and visionary architect of Poland’s liberal reforms. But in Poland, and elsewhere, the rejection of the 1990s is producing a misplaced nostalgia for the pre-1989 world.

Reason enough to think very carefully about the four observations that constitute Milanovic’s argument.  Interestingly, they appear to be a modern update of 19th century anti-liberal arguments – such as the famous catalogue of Pius IX.

Milanovic provides a syllabus of 1990s errors, listing what he believes to be the four key mistaken 1990s beliefs.

Presumable error No. 1: Financialization is good

For Milanovic refuting this conviction centers on how financialization in practice meant the rapid growth of debt and that the build -up of sovereign and personal debt subsequently became a dangerous substitute for economic equality.

The resulting debt trap exploded for many Asian countries (and Brazil and Russia) in the late 1990s, and then for rich industrial countries in 2008 with the financial crisis.

It certainly became easier to get into debt. But the basic insight in financialization and securitization – that debt can be a good way of channeling funds from those who have a temporary surplus to those who have a vision and a need (say to educate themselves or to build up investment) – is perfectly sensible.  This is what drives prosperity.

Asking rich people simply to hoard their assets is surely not likely to make people either happier or better off. It may very well be that in the United States, the UK or Spain borrowing fed a housing and construction boom rather than truly productive investment, but much of that was a consequence of land use regulation.

Presumable error No. 2: Multi-ethnic societies are good

Milanovic’s skepticism is doubtless correct in pointing out that in the 21st century, unchecked migration has become a liability and a source of political radicalization. This is true in many societies – not just in the developed world.

But that does not mean that all migration or all multi-ethnic societies are unstable.  Neither does is seriously suggest that the only solution is a return to nativism.

It is difficult to imagine the dynamism of the modern United States without immigrants.  Everybody can see that the Trump policies and their implementation through ICE have already produced major strains not just in the U.S. economy but U.S. society as well.

Low-skilled workers play a big role in agriculture, construction, health services, as well as in hospitality and tourism. And high-skilled immigrants are the fuel of the tech boom and Silicon Valley.

Europeans can observe the same phenomena in their countries, but often forget about them when they see outsiders making social security claims. But that is a problem with the way in which social security is designed, not with the story of a migration which benefits the recipient countries.  

At the Munich Security Conference, Rubio tried to explain that the transatlantic alliance was held together by “Christian faith, culture, heritage, language, ancestry, and the sacrifices our forefathers made together for the common civilization to which we have fallen heir.”

This nativist vision not only overlooks the economic dynamism that occurs as a consequence of the mobility of people who also made great sacrifices to move.  Many of them make the societies in which they integrated more successful.

Presumable error No. 3: Poor countries can easily become rich

Well, no one quite said it was easy.  Successful countries first needed to get the right institutional set-up. And when they did that – yes, then growth followed and low-income people gained, in a very wide variety of countries. (That is actually what Milanovic’s excellent work has demonstrated.)

Milanovic’s main point in attacking this 1990s belief, however, is that he sees hypocrisy insofar as western countries didn’t really want China to be rich, because then it would then become a threat to their privilege.

But this is a very China-specific case, and I’m not sure that I hear many complaints in Brussels, and even in Washington, that India or Vietnam or Mexico or Ghana, are becoming better off.

Even in the China case, it is also a mixed story – many people in rich countries are actually delighted to get cheaper and well-made products from China.  And that the Chinese also lead in photovoltaic batteries and electric vehicle technology is a major boon to consumers all over the world.  It is also a significant contribution to the effort to limit climate change.  

Is the argument about Western hypocrisy toward China really valid?

The hypocrisy argument is one that resonates quite powerfully with key figures in Chinese politics, including Xi Jinping.  They often claim that the West would never allow China to really succeed because of the deeply embedded western legacy of racism and imperialism, adding that the world will move forward without America.[3]

But that isn’t even a good description of Western leaders, many of whom were and are very keen to embrace China. Think of David Cameron and George Osborne’s evocation of a new “Golden Age” to be achieved by a China-UK partnership. Or Emmanuel Macron’s or Mark Carney’s recent journeys.

But also think of Donald Trump’s unwillingness to stand up to China, the way he backs down on the trade conflict giving rise to the moniker TACO (Trump Always Chickens Out), his appeasement over Taiwan and his enthusiasm for a “deal” with China.

Where western leaders should be critical of China is its intrusive etatism and its aggressive use of nationalism. There is frequently an insistence on an all-powerful controlling state that may be a problem for China and indeed a threat to the continuation of Chinese prosperity.

What’s wrong with growing out of poverty?

The 1990s claim was that rich countries and the elites there were keen to help poor countries grow out of their poverty. Not only was this right – but it succeeded, in many cases stunningly.

Think of Poland, which was an economic basket case in the 1980s, but turned itself around to become what Marcin Piatkowski rightly terms Europe’s growth champion.[4] Is anyone seriously regretting that?

And those who don’t regret it should try a bit of emulation – getting fiscal and monetary policy right, even at the price of pain during a wrenching transformation. 

Presumable error No. 4: Government is the problem

Milanovic is right that industrial policy has become a buzzword across the world. There was more industrial policy under Biden.  And as much as Trump detests everything Biden did, he is doubling down on his own, quite peculiar variant of industrial policy. (Is it successful? No, it’s a spectacular mess.)

And unfortunately, government is indeed still the problem in the sense that especially the big industrial countries, pushed by the combination of populist backlash and the demands of large organized special interests, have built up large public debt levels. Rich governments overdid the surge in unfunded borrowing.

This dynamic was first supercharged by the Covid pandemic itself and then by reflection on the political dynamic it produced.
In the U.S. case, for example, the result is continuing deficits of over 6 percent of GDP in an economy that is running hot, and a near impossibility of fiscal stabilization.

But it is important to note that it is politics, not financialization, that is driving this development. The Covid experience thus precipitated an intensification of a democratic dynamic that was already observable in the later twentieth century.

Assessing the 1990s

A recent volume edited by John Ikenberry and Peter Trubowitz on reassessing the 1990s, with a quite broad range of varying assessments, might be good place to consider the debate.[5]

In that volume, Charles Kupchan thinks of the decade as liberal overreach. (Some other scholars such as Samuel Moyn push the liberal overreach concept back to the 1940s and 1950s).

But consider this: If it hadn’t been for some of that liberal self-confidence, we could have seen all the elements of backlash that are so worrying now much earlier. 

Imagine a Russia under Vladimir Zhirinovsky, who looked like a credible leader for those unhappy about the dissolution of the Soviet Union and asked the appealing (to Russians) rhetorical question: “Why should we inflict hardship and suffering on ourselves? We should inflict hardship and suffering on others.”

A counterfactual about the 1990s and liberalization

It is reasonable to ask a counterfactual about the 1990s and liberalization: Had policymakers across the world not been so enthusiastic about liberalization, what would the development have been like? 

There would have been more strong men, more destructively, earlier. Already at that stage, aggressive ethno-nationalism looked like the best strategy for the old corrupt nomenklatura elites to survive.

In Europe, there would have been more Slobodan Milosevics and fewer Leszek Balcerowiczs.

The world would have been more brutal and poorer with autocrats and “strong men” everywhere: Absent the 1990s liberalization, it stands to reason that we would have been in the world of the 2020s far more quickly – without the intervening interlude that made so many people better off and more fulfilled.