Assessment 2: Major Essay

What is neoliberalism and how is it connected to 'development'?

Neoliberalism, quite simply, is defined by David Harvey as the:
… theory of political economic practices that proposes that human well-being can be best advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterised by strong private property rights, free markets and free trade... (2007, pg 2)
Through this approach, economic and social barriers and constraints are sought to be eliminated to prompt the market towards becoming self-sufficient. Therefore, it is very easy for neoliberalism to hinder the development of economies and society, as imbalances in wealth and living conditions are emphasised and expanded over time. In particular, these imbalances become quite prominent in developing countries, for example, Brazil, where they may begin to take importance over the conditions of the population. Despite this, we are still observing the existence of neoliberalism in the 21st century on an international scale as the globalisation era lingers and development continues to evolve.

In the modern world, neoliberalism offers ‘the supporting ideology of globalisation’ and depends on market forces, free trade and laissez-faire government roles to become efficient. (Heron, T. 2008. Pg. 1;Kelleher, A and Klein, L. 2011. Pg. 95) It was in the late eighteenth century when Adam Smith originally formulated the idea that in an economy, priority must be given to privitsation and it is necessary for trade and finance to be fully liberalized in order to achieve high economic growth. (Research Methodology, 2013) However, it is Friedrich von Hayek, an Austrian born economist, who is known as one of the founding fathers of neoliberalism for his fairly conservative yet predominant theories of the minimalist state as a solution to the inefficiencies of state regulations. (Boneau, 2004) Milton Friedman, Hayek’s colleague at the University of Chicago, is seen as the alternative founding father of neoliberal policies. The American economist held a modern view of Hayek’s theories and endorsed the return of small economies controlled by market forces with minimal government control and an emphasis on ‘deregulation, privitsation and radical tax cuts’. (Thorsen, D.E and Lie, A. 2007. Pg. 13)

The emergence of neoliberalism into international economies was essentially
‘to enhance growth, create free markets, replace the Keynesianism … and eliminate the intervention of the state in the economy that resulted in poor economic performance.’ (Ibrahim, A. 2011. Pg. 2) This was done through reforms revived from liberal ideologies such as cutbacks in deficit spending, decrease subsidies, distribution of tax, float exchange rates, eliminating protectionism, privatise government business, encourage private property and support deregulation. (Keily, R. 2004. Pg. 1-2) It was in the period of 1978-1980 where the most historic neoliberal movements were made; in China, Den Xiaoping controversially made the initial move away from communism and towards neoliberalism. Meanwhile, Pail Volcker was drastically reforming monetary policy as the new leader of the US Federal Reserve in 1979. During this time, Margaret Thatcher began her reign as British Prime Minister by endeavoring to restrain union movements and restrict the out of control inflation. Then, back in the US, Ronald Reagan was voted the new president and firmly backed Volcker’s initiatives in an attempt to reinvigorate the sluggish economy. At the time these events seemed insignificant, however, from these proceedings a movement was formed which revolutionised past global economic and social behaviors into the future. (Harvey, D. 2005. Pg. 1)

Development, essentially, is any growth or progress made from a previous circumstance; however, this definition can be often misconstrued into many meanings. In this instance, development would be considered as any social advances that enhance the circumstances for a countries population. (Oxford Reference) Many neoliberal economists believe that in order to seize poverty in developing nations, economic growth strategies must be put into place in order to promote better social conditions for these underdeveloped economies. These neoliberal ideals were initiated into development by Peter Thomas Bauer in the 1940’s, where he established the notion that government planning, controls and protectionism in developing countries becomes more harmful to development then helpful. Yet, it was during the 1970’s when neoliberalism emerged as a mainstream system in developed and developing economies around the world to combat economic and social issues. (Ibrahim, A. 2011. Pg. 2) However, due to the vast amount of freedom associated with neoliberalism, developing countries became significantly disadvantaged and human rights were easily violated. (Research Methodology, 2013) Reforms encouraging of free trade were implemented without considering the repercussions these policies may have on development, including ‘labor rights, environmental protection and human rights’. Initial assumptions portrayed that a free market would encourage economic growth, which in theory would promote a reduction in poverty. However, due to dependence on market forces and ignorance towards social welfare, income inequality is still a major concern as disparity continues to grow, especially in developing countries, and neoliberalism is argued to be responsible. (Ibrahim, A. 2011. Pg. 5-6) Thus, neoliberal reforms have only fabricated over a very distorted perception on the reality of living circumstances and the capacity to make an improvement on ones life. David Harvey also observed this trend as he notices a pattern of ‘creative destruction’ in many established frameworks, authorities and social cohesions such relations, welfare schemes, lifestyles and personal beliefs that have been caused by the ignorant implementation of neoliberal policies. (Harvey, D. 2005. Pg. 3) Neoliberal implementation, particularly in developing nations, is not often initiated by domestic influence, but more often then not by international government agencies.

Since the 1980’s, neoliberalism influences have guided the activities of the International Monetary Fund (IMF) and World Bank. Over this period of time, the role of the IMF has shifted away from managing global finance to offering assistance to financially volatile governments; meanwhile, the World Bank has also seen a change from its initial focus of financial assistance to countries affected by World War II. (Ibrahim, A. 2011. Pg. 3) The initial sign of neoliberal ideals taking shape in the World Bank was in a development report formed concerning sub-Saharan Africa development. The report concluded that several problem areas for the region, including poor economic growth and a declining population, could be resolved by giving high production priority in the economy. From there, the IMF and World Bank deployed funding and loans to help support and ease economic burdens in developing nations. The IMF and World Bank received a lot of criticism for the way that their neoliberal policies were implemented and governed. This was due to most strategies employed by the organisations were often in favor of developed and wealthy nations, causing negative social and economic impacts on developing nations. For example, the conditions placed on loans offered to these poor nations by the IMF often exploited state sovereignty rights and were not suited to the circumstances of individual countries. The World Bank also sparked hefty criticism after it funded several projects that were caused major disadvantage to minorities, such as the sponsorship by the World Bank for the building of hydroelectric dams that caused many indigenous persons in several developing countries to become displaced from their homes. (Bretton Woods Project, 2012)

In 1989, the World Bank, International Monetary Fund, the Federal Reserve Board and the United States Treasury met in Washington to collaborate a consensus of what was thought to be ‘necessary elements’ for nations to achieve development. (World Health Organisation) Titled by John Williamson as the ‘Washington Consensus’, the framework was comprised of ten reform policies which represented neoliberalism ideals being put into practice through two phases; firstly, macroeconomic stabilisation including fiscal discipline, competitive exchange rate, and liberalisation of foreign direct investment and interest rates. Secondly, microeconomic reforms including trade liberalisation, privatisation, tax reform, property rights, deregulation, and reordering public expenditure. (Williamson, J. 2009)

Through the influence of the IMF and World Bank, most Latin American countries had embraced the ‘Washington Consensus’ by the end of the 1980’s, mostly as a condition on loans. However, it was in the 1990’s when Latin America fell under the influence of neoliberalism policies and globalisation. In particular, Brazil gradually initiated reforms outlined in the ‘Washington Consensus’. In an economic sense, neoliberalism had an optimistic effect on development in the decade following its implementation. Some of these successes include the general price index (GPI) and consumer price index (CPI) both stabilised dramatically during this period. This is evidently noted by Edmund Amann and Werner Baer in the Journal of Latin American Studies, where the GPI dropped from 2,740.2 per cent in 1990 to 9.8 per cent by the 2000’s and CPI fell from 8,863.9 per cent in 1990 to just 6.0 per cent in 2000. (2002. Pg. 949) Foreign direct investment also flourished from just $2 billion when reform policies where introduced to more then $30 billion by 2000. Improvements in these figures meant that during this period of the 1990’s, inflation decreased substantially and allowed goods and services more affordable to those living in Brazil. However, anemic real gross domestic product during the 1990’s where GDP growth varied from negative growth of -4.3 per cent in 1990 to 5.9 per cent in 1994 and back to 0.8 per cent by the end of the decade. Fiscal policies often lagged considerably, largely due to political reasons, causing a notable delay in improvements. (Amann, E and Baer, W. 2002. Pg. 945-51)

Despite considerable economic success Brazil’s distribution of income was not resolved during the decade of neoliberal reform process. The inability to combat inequality disparity and social cohesion within the developing world is a critical flaw of the neoliberal approach, and became a major issue within the Brazilian economy. (Ibrahim, A. 2011. Pg. 6) This overwhelmingly existing problem is clear when observing the Gini Coefficient, which during the1990’s remained contently around 0.60 and the gap between the richest 10% and poorest 10% only reduced marginally. (Amann, E and Baer, W. 2002. Pg. 951-53) Even though, the 1990’s saw an increase in Brazil’s Human Development Index, it’s position relative to the rest of the world dropped; putting Brazil’s HDI below the standard for developed countries and behind most of its fellow Latin American countries. Most startlingly during this period, there was an increase in urban violence, with a severe rise in homicides, especially in Rio de Janeiro and Sao Paulo. Employment opportunities in the industrial sector also decreased throughout the 1990’s and total unemployment jumped from 9.4 per cent towards the end of 1990 up to 16.2 per cent by 2000. It was these kinds of negative social impacts in Brazil and other developing countries around the world that gave neoliberal policies a somewhat negative reputation in the modern world, especially for the IMF and World Bank.

In some senses, the implementation of these policies offered ease to the poor in Brazil; for example, trade liberalisation boosted the demand for unskilled labor and a foreign direct investment encourages growth and innovative technologies. (Williamson, J. 2000 Pg. 257) However, these reforms, no matter how helpful their intent, were implemented with total disregard of implications on social development and while neoliberal ideas are still present in Brazil today, there is a lot of challenge against its policies. It becomes evident, that the neoliberal approach towards development is particularly unforgiving towards social issues; however, if effectively introduced in developing countries to cohere with both social and economic concerns with consideration of countries individual circumstances, a successful neoliberal state may be possible. Thus, as stated by Simon Reid-Henry, ‘it was precisely this sort of dogmatism that made neoliberalism itself so much more dangerous than the previous generation of ideas.’ (2012)

Bibliography
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