The Political Economy of Global Development: Neo-Liberalism

Using Desai & Potter Chapter 2.5 & James Putzel ‘Globalization, L:iberalization, & Prospects for the State’

What are the main claims made by neo-liberals about development? How valid are they?

• Essence of neo-liberalism: an economic creed that seeks to deregulate markets as much as possible to promote ‘free’ trade. (Desai & Potter 2.5) For neo-liberals, through these policies/actions, development can occur.
  

• Cut in taxes - can be established by selling off loss-making and inefficient enterprises & restricting the role of the state to regulation & economic facilitation.
• Neo-liberal’s naïve belief in the ‘magic of the market’ as the most efficient economic regulator.
• Neo-liberal ideology rapidly became the economic orthodoxy in the North & was exported to the global South via aid policies and the measures formulated to address the debt crisis.
• The IMF assumed the lead role in addressing the debt crisis, which hinged on Northern self-interest & a determination to protect the international financial system. The problem of default was diagnosed as entirely the fault of the debtor countries (blamed for corrupt, interventionist governments bloated by bureaucracy & weighed down by inefficient state enterprises & the adoption of inappropriate policies), not on dramatic interest rate increase or the willing contraction by both parties for the loans in question. IMF’s policy response was therefore geared to maximizing prospects for and amounts of repayments by debtor countries.
• SAPs designed to cut govt expenditure, reduce the extent of state intervention in the economy, promote liberalization & international trade.
• SAPs comprised 4 main elements; (1) the mobilization of domestic resources, (2) policy reforms to increase economic efficiency, (3) the generation of foreign exchange revenue from non-traditional sources through diversification, as well as through increased exports of traditional commodities, (4) reducing the active economic role of the state & ensuring that this is non-inflammatory.
• The instruments used to achieve these elements were divided into 2 categories (according to Simon):
• (1) stabilization measures: these were immediate, short-term steps to stop deterioration in conditions & provide a foundation on which longer-term measures could act. This could be done through; a public sector wage freeze (reducing wage inflation & govt salary bill), reducing govt expenditure (by reducing subsidies on basic foods, commodities, health & education), currency devaluation ( making exports cheaper & thus more competitive, deterring imports).
• (2) adjustment measures: implemented as a subsequent phase designed to promote economic structural adjustment & competitiveness. This was done through; export promotion (through incentives & diversification), downsizing the civil service (to reduce overstaffing, duplication & inefficiency in job allocation), economic liberalization (relaxing & removing regulations on economic activity in the name of efficiency), privatization (to reduce direct economic activity & resource use by the state), tax reductions (to create incentives for individuals & businesses).
• Adoption & implementation of an IMF-approved SAP became a pre-requisite for obtaining financial support.
• Tenuous assumption underlying PRS is that neoliberal macroeconomic reform will promote a reduction in poverty as a result of leaner, fitter more efficient economic management & political governance.
• The resurgence of conservative doctrine of neoliberalism at the end of the 1970s was rapidly translated into development & aid policies by the Northern donors. This required debtor countries to bear the full costs of adjustment & recovery. Environmental costs were substantial too.

What is wrong, if anything, with an international division of labour based on specialization?

• SAP’s placed export promotion as a necessity, based on the Ricardian notion of comparative advantage. Each country should specialize in and export those commodities that it can produce more cheaply than its competitors. (Desai & Potter 2.5)
• Food security was undermined by IMF insistence that food crop production be switched to cash crops for export if comparative advantage existed. E.g. 1991-2 Zimbabwe was pressured into selling its maize surplus rather than retaining it as buffer stock. When the rains failed, massive maize imports then became necessary – which were very expensive.

• An international division of labour based on specialization is often a bad idea as a lot of work in developing countries is seasonal; therefore creating unemployment & underemployment for most of the year. E.g. Latin America.
• Specialization in developing countries can be based on agriculture – if crop fails then importers will look to other countries, creating a loss of income for that country and unemployment.
• Focusing on comparative advantage means that country is not focusing on improving and developing other factors/standards. As soon as cheaper exports appear, former country will be out of work and have no other exports to fall back on.

Notes on Desai & Potter (2.5):

• SAPs were refined in the late 1980s & 1990s, taking better account of local circumstances and social development needs.
• Distinction emerged between SAPs, which were the initial programme implemented by a country over 3-4 years, & then the follow up ERPs over similar duration – which were designed to promote broader economic restructuring.
• The impacts of SAPs were frequently harsh – even IMF acknowledged early SAPs were excessively economistic & neglected or retarded social development.
• Initial assumption was that successful adjustment would lead to rapidly increasing FDI (although this has not occurred in most countries – Simon & Wood).
• Among the worst-affected groups were the urban poor & urban-based civil servants – who have lost their jobs, suffered severe salary erosion & faced steep commodity price increases as commodity subsidies have been slashed, & transport fares & utility prices have been commercialized.
• The principal beneficiaries have been large traders & import-export merchants.
• Economic & political conditionalities attached to SAPs & ERPs represented an unprecedented invasion of the right of sovereign states to determine their own economic & political policies.
• During 1999, SAPs & ERPs were superseded by a more ‘positive’ & cooperative approach known as PRS (poverty reduction strategies). Same time major donors reinvent ‘aid’ as ‘partnerships’.
• However, PRS have continuity of underlying donor policy; lending remains conditional on adoption & approval of PRSP.
• PRSP must, however, prioritize antipoverty expenditures & are supposed to be prepared through a wide-ranging & deep process of consultation with civil society. However, Fraser & Larmer see them as a form of social control, & the participatory process as a Trojan Horse.

Notes on James Putzel:

• Champions of globalization can be divided into 2 camps; (1) advocates of economic liberalization & (2) the promoters of global governance. Both camps share a common scepticism of the state, which ignores both the developmental lessons of history & the perverse impact liberalization has had on peace & security.
• Joseph Stiglitz is a guru for the worldwide ‘anticapitalist’ movement – ‘how globalization today is not working for many of the world’s poor’.
• Martin Wolf lays out the case for ‘why globalization works’. ‘Liberal globalization: the integration of economic activities via markets’ driven both by technological changes & policy changes.
• This process has been driven at least for 2 centuries by the expansion of capitalism (has been clear since 1848 Marx & Engels).
• In some ways, global economy was more integrated in the late 19^th century than at the start of the 21^st (even though operating at a much smaller scale).
• Anthony Giddens celebrates the creative possibilities of globalization & the rise of the new individualism. He argues that transformation of space & time has weakened nation-state, regenerating local identities & forcing govt coalitions with non-governmental actors to exert governance.
• Advocates of global governance point to state’s tendency to make war & trample the rights of individuals.
• Di John demonstrates how liberalization has been associated with deepening stagnation & increased income inequality in Venezuela.
• There are simply no historical examples of development occurring under the conditions of openness and liberalization promoted in the South by the international development community. Accelerated growth has required state involvement, control over the allocation of foreign exchange, and subsidies & protection for infant industries.
• China & India are great achievers in relation to growth & poverty reduction during recent decades yet their success was based in no small measure on the illiberal characteristics on their economies - Milanovic.
• Gutierrez demonstrates how the prescriptions of liberal democracy have made military coups less likely in the Andean region, but how, combined with economic liberalization, this favours a semi-democracy which limits the possibilities for voice.
• The disappearance of the Soviet bloc has also removed the ‘checks & balances’ within the international system, leaving hegemonic power in the hands of the US.
• An examination of the events surrounding the invasion of Iraq show how little effect non-state actors have in determining the course of events. Clearly the role of states remains crucial.
• The removal of trade barriers in developing world, combined with the relaxation of state control over foreign exchange provided subnational & non-state actors access to international markets. This allowed the sale of resources (narcotics & diamonds) & the purchase of commodities (weapons) as well as avenues to spirit profits away to banks in European & North American cities - Naylor. This created a perverse & vicious cycle; falling state revenues, increased ineffectiveness of authority, allowing expanded smuggling, leading to further declines in revenue. This pattern of incentives could only increase violence – Keen.
• Even if adjustment is not the cause of state collapse, it undoubtedly weakens it. Stewart demonstrates violent conflicts are most likely to emerge where societies are marked by horizontal inequality (unequal distribution of power & income between groups).
• In Venezuela, the increased informalization of employment has accelerated the decline of traditional sites of political claim-making and organization, undermining political parties.
• Where state legitimacy is weak, increased role in politics played by religious institutions are by definition exclusionary, having a corrosive effect. Webster reports the rise in influence of these religious institutions.
• Downsizing & outsourcing has left the security sector, particularly the armed forces, most organized and cohesive component of the state.
• While liberalization formula was promoted as means to fight corruption in developing world, evidence suggests privatization & deregulation have in fact increased it.
• When states collapse, the first order of business must be to engage in their reconstruction. The most appropriate & feasible types of state in conditions of late development are semi-democratic ones.