What is Neoliberalism?
Neo-liberalism has always been liked to “privatization,” “deregulation,” “decentralization,” or “tax reform.” The famous definition of neo-liberalism is by Paul Treanor who defined it under the book “Neoliberalism: Origins, Theory, Definition” as:
“a philosophy valuing the market existence and operation as it is, distinct from any of its previous links with the production of goods and services . . . and where the market and similar structure’s mechanics are seen as normative by itself, enabling the related actors to be ethical and responsible in their human actions and replacing for all the pre-existing moral beliefs (Fish, p. 1).”
Interestingly, neoliberalists discourage state intervention. The market runs by itself and it sets its own order. This has been institutionalized by the U.S. President Ronald Reagan and Great Britain’s Margaret Thatcher (p. 1). In the last 30 years, neo-liberalism has become the major economic and political theory in the United States (Saunders, p. 4). It has revived and strengthened the classical liberalism that was the foundation of the U.S. socio-economic policies in the 19th and the late 20th centuries. The theory’s principles have been widened and it was indicated by the remarkable state-sponsored social services, the extension of the economic principles of neo-liberalism to socio-cultural and political systems, and the acknowledgment of the individual as an independent, economic agent rather than a mere citizen of the state (p. 4). Thus, the new meanings of the roles of political, social and economic institutions have emerged during this neo-liberalist period (p. 5). During the final years of the 1980’s, the international stage of neo-liberalism emerged with the international expansion of the democratic electoral systems along with capitalism (Fish, p. 1).
Neoliberalism is basically an economic theory which espouses that the market forces should be left alone (Evans, p. 14). It assumes that human beings make wise choices and thus, they must be left to make their own economic decisions under a formal framework. This framework is defined by a strong private property rights, free trademarks, and free trade (Harvey, p. 12). The state shall guarantee this framework but it must also interfere with the dynamics of the market forces. Its role should be limited to ensuring the quality and integrity of the money system. It must also strengthen the support systems for the formal framework to work best. These include military, defense, police, and legal structures and functions. State functions also include promoting the proper functions of the free market by developing the lands, water, education, health care, social security, and the environment (p. 13). The essence of neoliberalism can be simplified by saying that state interventions in markets (after it has been created) must be kept to a bare minimum.
Neoliberalism also means the expansion of the market economy (Saunders, p. 1). It attempts to reduce the trade barriers such as the tariffs and government subsidies of various industries. It also means promoting the right and perfect environment where growth and investments will grow. It also means decreasing tax rates for businesses to attract more foreign investments. It also means that the state’s social service functions are limtied (p. 1).
This paper shall delve into the theory and practice of neoliberalism as applied in the Latin American Region. This researcher chose this region in order to show the principles of state functions and the dynamics of a free market economy in a developing region against the backdrop of a global economy.
Global Contexts and the Need for Neoliberalism: A Backgrounder
Werlholf (p. 1) reduces the heart of neoliberalism in today’s global economic environment as “self-interest and individualism” and separation of “ethical principles and economic affairs” and as a “mere cost-benefit calculation and profit maximization.” Just like globalization, neoliberalism is driven mainly by competition as its main fuel for growth and progress. It also drives a subsistence economy to become a profit and trade oriented economy with less state intervention (p. 1).
In many ways, the capitalist theory embodies a “natural law,” which is also supported by neoliberalism. This helps push global capitalist power and speeds ups the global promotion of neoliberalism (p. 1). The practical consequences of neoliberalism are illustrated by the economic fall out of the Latin American economy. First, small, medium, even some larger enterprises are pushed out of the market. They are threatened, folded and even swallowed by multinational corporations because they are not “competitive enough.” The public sector is often reduced into the non profit segment of the economy and its administration. The profitable segments are handed to commercial groups through privatization. This lessens the public funds for social services such as education, health, etc. Medium and small scale industries and businesses are also affected and hence, the work force is also affected. Jobs are lost due to global competition, even of human resources (Pollin, p. 72).
Neoliberalism in the global economic environment also means that production has become focused on small parts of the economy. This is very evident in the financial system (Campbell, p. 61). Financial capitalists control asset value ever more aggressively. These lead to new forms of private property. Natural resources, communications and private spaces are also relegated to the private sector.
The international involvement and the applications of neoliberalist economic policies often result to worse economic conditions rather than development. Hence, critics argue that economic policies must not follow the neoliberalist principles. Others also argue that the forms of neoliberalism are actually forms of neocolonialism (Brown, p. 45). It is characterized by the exploitation of the First World or the more developed nations of the less developed economies such as those of the Latin American countries. Harvey (p. 32) argued that the national elites exploit neoliberal reforms so as their economic interests are protected at the cost of the poor people. He cited the primary example in the case of Argentina, wherein the failures of the neo economic system wwere influenced by the foreign interventions of the United states.
These arguments are countered by economists and scholars such as Stiglitz who reinstate that there is no “neo-imperial plot” (Harvey, p. 112). They believe that the system is drawn by a combination of economic and political ideology and special interests. Pure neo-liberalists argue that neoliberalism is a perfect system and it cannot fail. They espouse that when applied to international markets (as it is the trend now), it is the system which will collect the most positive outcomes for the economy. In reality, less developed economies have premature institutions which can perfectly work well under the neoliberalist system. Hence, they are also very prone to the risks and exposure to foreign investors and multinational companies and international businesses. All these imply that developing countries like the Latin American countries often have less privileged access to global markets than the developed countries. The global investors are investing in foreign companies (usually from the developed countries) inside the less developed countries instead of investing the less developed countries’ local businesses. This perpetuates an unfair system of trading and investments. In addition, the speculative flows of capital usually enter the less developed country during an economic boom and it instantly goes away during the country’s recession. This cycle often results to a deepened economic crises and destabilized economy (p. 48).
During the 1990s, many Latin American countries went under the neoliberalist economic model and they have undergone many structural reform policies (Werlhof, p. 1). Neoliberal policies imposed the ruke of the Latin American markets. It also limited the governments’ roles in the Latin American economies and its deregulations. Their political, social and economic reforms and policies affected the most crucial Latin American macroeconomic indexes, with remarkable failures as exemplified by Argentina and Mexico. These countries suffered most from the economic crises of the 1980s and the 1990s (p. 1), especially when their governments were heavily influenced to implement neoliberalist reforms.
There were some actual improvements in some of these two countries’ macroeconomic indexes. However, in general, the neoliberalist movement in Latin America failed to reduce poverty and unemployment. It did not result to the equitable distribution of the wealth of the nations and the improved welfare of the Latin American people.
Neoliberalism became a major economic force in Latin America in the 1990s due mainly to the following: debt crisis, the availability of very well educated technocrats, a new breed of entrepreneurs, the weaknesses of the import substitution industrialization, and the lack of public support. Most Latin American countries applied neoliberalist reforms in the 1980s and 1990s after they have been invovled with the debt crisis. Chile has started early on with its neoliberalism way ahead in the middle of the 1970s (p. 2). Hence, the majority of the Latin American countries actually submitted to neoliberalism in the hope of a more positive economic outcome following their debt crises and prolonged economic upheavals.
These debt crises were due to the dramatic increase in oil prices at the onset of the 1970s (p. 3). Because of this rise in oil prices under which the Latin American countries were trying to industrialize, most of their governments were forced to borrow money to push on with their modern development plans (p. 3). Initially, this enabled them to grow amidst the oil price hikes.
Latin American countries kept on borrowing money to pay for oil from the oil producing nations, which in turn deposit their money to multinational banks. These foreign banks had to pay interest on these “petrodollar” deposits (money earned by oil producing countries through oil) and thus, these banks attracted more borrowings from the already indebted Latin American countries. They used the money as capital to sustain the purchase of oil and other raw materials from the industrialized nations (p. 4). Hence, the banks had to sustain a logical pattern for gaining interest payments and it was made through the availability of capital for the less developed countries.
As an outcome, the Latin American countries’ foreign debt doubled in a span of twenty years, starting from the 1980s to 1990s (p. 12). Sadly, most of the collected debts were paid for interests which increased over some specific period in time. The risks of interest hikes were independently accounted by the borrower country. Since the interest rates kept on increasing, the exports of the Latin America countries fell in terms of their prices. This made them to default on their loans (p. 21).
Defaulting on foreign loans is bad for both the lender and the borrowing country. Thus, most banks and nations agreed that debts should be renegotiated than for the defaulters to declare bankruptcy. Prior to a country’s renegotiation talks, however, international monetary institutions such as the World Bank (WB) and the International Monetary Fund (IMF) require the implementation of structural adjustment policies on the borrowing countries (p. 22).
This is a major reflection of a big flaw in the neoliberalist system (Brown, p. 78). As it initially espouses less government intervention/s, in this respect, it accounts the national government to make important and crucial changes to its economic and social policies. In turn, these major reforms and policy changes were forced on the Latin American countries to ensure repayments to the financial institutions. These banks did not sincerely study the social and human factors in the economic equation. They did not fully recognize the effects of these reforms on the citizens. They did not mind whether the social services will be out of funds because most of the countries’ budget will be turn over as repayment or interest payments to them.
The negative effects of neoliberalist policies are far reaching for the Latin American countries. It was specifically hurtful for most of the Latin Americans. After the said reforms were implemented, there was an increase in income inequality in most Latin American countries (p. 68). People lose their jobs and a consequent higher unemployment rates occured. The public service aspects was scaled down and the state operated enterprises were forced to be sold to private sector entities. Since neoliberalist principles reduce subsidies on major enterprises, the prices of basic commodities such as food, fuel and social services have remarkably increased (Fish, p. 1). As an example, then Peru President Fujimori immediately implemented neoliberalist fundamentals when he came into power in 1990. After that, a dratsic impact was seen in the country’s rapid gasoline price hikes by 3000%. Subsequently, Peru’s telephone and water prices also increased by 1300%, and their electricity prices rose by 5300% (Werlhof, p. 1).
In Haiti, where many of the inhabitants did not have enough for basic subsistence, land was maximized to produce flowers for export. While many Haitians did not have enough access to their own land so that they can grow flowers by themselves, big export businesses gathered most of the flower production and its profits. While exports contributed to Haiti’s overall GDP, the people remained poor (Prasad, p. 110).
Inherent property rights were to blame for this extreme economic situation. Sadly, this aligned very well within the principles and applications of neoliberalist reforms. The issue of property rights, specifically when they promote and protect big companies under a liberal market-oriented governance, damaged the inherent rights of the Haitians (p. 111). It was a formal type of an injustice but in the neoliberal system, this is not viewed as unethical.
Other sad examples are shown by Mexico and Chile where most of the land cooperatives were legally and collectively held since the early 1970s. This was legally made possible by their democratically elected government. From 1975 to 1979, the Mexican and the Chilean military dictators implemented land counter-reforms. Under the governments’ neoliberalist reforms, however, the lands were extensively liberalized on its own markets. They privatized most of the land co-ops and majority of the Mexcian and Chilean residents were left landless and homeless (p. 21). The people were forced to sell their lands to private families and agri-business. Because of such neoliberal reforms, many Mexican and Chilean peasants were banned from collectively acting to protect their inherent lands and their own ways of living (p. 27). This set up had a very extensive impact on the lives of many people. However, this happened as these Latin American governments and their free market economies were allowed to take its toil on the people and their cultural and economic heritage.
On the positive note, neoliberalist principles and applications also proved some positive outcomes for some Latin American countries. To illustrate, Brazil has evidenced a remarkable growth for a certain period of time. Its most remarkable achievement was seen in the 1990s when the country achieved price stability shortly after it introduced its economic policy called, The Real Plan (Amann & Baer, p. 949). Its general price increased after it peaked at 2,406% in 1994 (p. 950). It then dramatically fell in the subsequent years, not exceeding one digit from 1997 till then.
This achievement mainly resulted from the implementation of a very strict monetary policy. This was integrated with the delayed effects of widening the gates of its economy to global competition. But then, the fiscal adjustment policies were also initiated for several political reasons. Brazil lagged behind in this respect. The major balance of the country’s budget only went into surplus in 1999 (p. 951).
For several reasons (such as investment liberalization, privatization and the emergence of Mercosul), Brazil experienced a great increase in the inflow of foreign direct investments (Taylor & Jordan, p. 146). This grew from a yearly average of less than US$10 billion at the onset of the 1990s and then it attained an annual average at the end of the decade of more than US$30 billion. Of the country’s direct foreign investments, an estimated 40 per cent were dedicated to the privatization process. The remaining amount was led by investments linked with international bank take-overs and expansion and modernization of Brazil’s production facilities.
Conclusion
Neoliberalism is an ideal economic and political system if it is played in a highly open, equal field. This means that developing countries such as the Latin American countries have the same economic conditions and privileged access to international markets the same way that First world eocnmies have (Cohen, p. 21). Hence, the foreign investments, reduced social services and neoliberalist reforms and policies will have the same impact on both the developed and less developed economies and it will eventually even out the economic situations and the whole playing field.
The main standards will then be focused on how the various national governments allow its free market economy reign and what effective policies it can apply to sustain the conducive growth and development (for their economy as well as those of the others) (Kenneth, p. 28). Sadly, the realities of the globalization and the trends of foreign investments and trading and the global, financial systems only favor only those developed economies such as the United States, Great Britain, France, and other well developed economies of Europe (p. 29).
The economic realities of the Latin American examples showed us that the neoliberalist theory does not actually work well in Third world countries. It then goes back to the greater conclusion that the capitalist system is still the main vehicle by which globalization works (Keohane, p. 25). It also implies that the free market economy is sustained and it is imposed to the less developed eocnomies. The unfair economic system goes on like the old cycle of the colonial economies which have been applied by the colonialist nations in the past. Inherently, this researcher believes that the government should still play an important support to the national economy regardless of what economic system it applies.
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