Beyond neoliberalism: A road map for S'pore

Beyond neoliberalism: A road map for S'pore

In his recent writings, former British Minister of Science and Innovation David Sainsbury warned against the continued adherence to neoliberal models of economic development.

Such models are based on the logic that economic growth is the basis for everything and the market the dominant organising mechanism for achieving growth. He called for it to be replaced by a new "progressive political economy".

Although it remains within the paradigm of capitalism, this new progressive political economy calls for a greater role of state institutions in guiding markets.

It is also strongly focused on social justice or fairness as a measure of economic performance. Indeed, the global financial crisis of 2008 has led economists and policymakers to question the fundamental principles which underlie neoliberal capitalism.

In particular, the crisis laid bare the deficiencies of the unfettered free markets which form the centrepiece of neoliberal capitalism. Despite this, states and firms remain ensconced within the neoliberal paradigm of political and economic governance. As a consequence, financial markets remain mired in excess, while income inequality remains high in the world's leading financial centres.

Nonetheless, the global financial crisis has exposed three inherent weaknesses of free markets which need to be addressed.

First, free markets are not perfect. They are fraught with information asymmetries that hinder the effective governance and regulation of markets. There has been an increasing awareness since the financial crisis that markets are much more complex and much less rational than conventional wisdom had assumed.

Second, markets are not fair. Many developed economies and financial centres are experiencing high levels of income inequality. With a Gini coefficient of 0.412 in 2013, Singapore is not exempt from these trends either. In such economies, the size and importance of the financial sector relative to the overall economy is also becoming larger.

Third, free markets are not really "free". Rather, there are important social and environmental costs that emanate from the daily functioning of markets which are not priced into the system. Economists call these costs "externalities". One obvious externality is the systemic instability and economic hardships faced by households during financial crises.

In fact, even the haze can be seen as a negative externality of neoliberal capitalism, given that much of the forest fires arise from illegal land clearing practices by companies operating in Indonesia.

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