Neo Liberal Theory of

Economic Development
The origin, ideology, its effects and implications to the 21st century

a t i o n
i c i palis
Mu n

gu la t io n s
Tra d e R e
ontr o l &
Price C

Prepared by: Karthik Girish | Ishita Saraswat | Gruhasree Deevi | Siddhesh Ravindrakumar Kudale
 Aim of the presentation
This presentation focusses on one of the
most popular yet failed theory of
economic development, Neo-liberal
theory of economic development.

- It focusses on how the theory

originated and evolved

- It explains how the theory was applied

and the impacts created

- It tries to explain the criticisms given

from various perspectives and
concludes from a planners
standpoint.
Development Planning Neo Liberal Theory 2
 Table of Contents
I Pre-requisite concepts to neo-liberalism 1
• Liberalism
• Market Liberalism
• Capitalism
• Globalisation
II Context to Neo-liberalism 9
III Origin of Neo-liberalism 10
IV Characteristics and difference from liberalism 11
V Historical application of the theory 15

VI Impacts and Implications 17

VII Criticisms to the theory 21
VIII Conclusions 25
IX References

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 Before we try to
understand the theory Liberalism

of neo-liberalism, let’s
understand the Market Liberalism

following concepts…

Capitalism

Globalisation

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 Liberalism
Liberalism is a group of political, social
and economic theories that centres on
the values of individual liberty, equality,
economic freedom, limited and
democratic government and the rule of
law.
It refers to freedom from undue or
oppressive restraints on a person's
actions, thoughts or beliefs imposed by
the state.

It also holds that all individuals should

have equal treatment before the law
regardless of social status, race or sex. Father of Liberalism: John Locke

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 Market Liberalism
Market Liberalism is an economic
freedom that is closely associated with
liberalism and involves support for free
markets and private property rights.

It allows markets to function without

any state interference and allows the
market to function by combining free
market economy with personal liberty
and human rights.

Cartoon depicting the end result of market liberalism; the

ever-lasting gap between resources and people who need it.

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 Capitalism
Capitalism is an economic system in
which private individuals or businesses
own capital goods. The production of
goods and services is based on supply
and demand in the general market.

The purest form of capitalism is free

market or laissez-faire capitalism.
Here, private individuals are
unrestrained. They may determine
where to invest, what to produce or sell,
and at which prices to exchange goods
and services. The laissez-faire
marketplace operates without checks Capitalism; where workers work to put food on the table of

or controls (similar to market liberalism). capitalists.

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 *Globalisation is discussed as neo-liberalism was brought out at the time globalisation was being introduced to the world

Globalisation*
Globalisation is the spread of products,
technology, information, and jobs
across national borders and cultures. In
economic terms, it describes an
interdependence of nations around the
globe fostered through free trade.

On the upside, it can raise the standard

of living by providing job opportunity
and improved access to goods and
services.

On the downside, it can destroy job

opportunities in more developed and
Negative impacts of Globalisation.
high-wage countries.
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 Context to Neo-liberalism
1. It was the time post WWII

2. Policy-makers and administrators were mostly following concepts revolving

around Keynesian theories, or social-democrats/ social Christian democrats, or
believed in some shade of marxism.

3. Since the war had taken place, the first order of business was to regain the
economy and resume world trade. And it was at this time that the strong winds
of decolonisation also began to blow, whether freedom was obtained by grant as
in India or through armed struggle as in Kenya, Vietnam and other nations.

4. Karl Polanyi wrote “The Great Transformation” in 1944 and specified that
"To allow the market mechanism to be sole director of the fate of human beings
and their natural environment...would result in the demolition of society" 

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 Origin of Neo-liberalism
5. But, after studying the book, a philosopher-economist Friedrich von Hayek and
his students like Milton Friedman at the University of Chicago, started to create
the ideology of neo-liberalism and created a huge international network of
foundations, institutes, research centres, publications, etc. to push their ideas and
doctrine relentlessly.

6. People slowly started believing that the market should be allowed to make major
social and political decisions; that the State should voluntarily reduce its role in
the economy, or that corporations should be given total freedom, that trade
unions should be curbed and citizens given much less rather than more social
protection.

7. These ideas were then taken forward by leading political figures, namely, Margaret
Thatcher (UK), Ronald Reagan (US) and the famous Chicago Boys (Chile).

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 What is Neo-liberalism
Neo-liberalism is an economy where
the government has few, if any, controls
on economic factors (seemingly similar
to market liberalism and laissez faire).

It tends towards free-market capitalism

and away from government spending,
regulation, and public ownership.

Friedrich von Hayek, along with his

students derived this into a full fledged
theory, based on ideas given by Adam
Smith in his book “Wealth of Nations”.
Friedrich von Hayek and his students

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 Characteristics of Neo-
liberalism
The advocates of neo-liberalism
propose:

1. The reduction or elimination of most

business regulations that were
imposed by the state or government.

2. The government should be required

to balance its budget.

3. Taxes should be low and should not

be complex to calculate.
The truth behind neo-liberalism

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 Characteristics of Neo-
liberalism
4. They also believed that the
government should necessarily
divest itself from any service that can
be provided by the private sector.

5. Finally, they believed that trade

among nations should be open with
few, if any, protections and
constraints.

People believed that it provides the

greatest possibility of economic
growth and equitable distribution of
resources and wealth.
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 Neo-liberalism and Liberalism
Neo-liberalism focusses a lot on
markets.
Neo-liberalism focusses a lot on utility
maximisation, intensive trading,
auctions, automated trading, speed of
selling in the markets, etc.
Liberalism focusses a lot on every
social aspect of human beings and
the society.
Market Liberalism has nothing to do
with utility maximisation or
expansions.

Neo-liberalism focusses a lot on Liberalism focusses a lot on property.

contracts.

Neo-liberalism does not advocate laissez-faire economic policy but instead is highly
constructivist and advocates a strong state to bring about market-like reforms in
every aspect of society (everything to be privatised).
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 Historical Application of
Neo-liberalism
Margaret Thatcher and Ronald Reagan
propagated propositions of free
market and free trade after 1980 and it
is still impact on today’s political,
economic, and cultural system under
the guise of globalisations,
neoliberalism has become the
dominant ideology and has been
embraced by the countries all over the
world. They emphasised on
competition.
Former British Prime Minister Margaret Thatcher and Former
US President Ronald Reagan

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 Historical Application of
Neo-liberalism
In Chile, the Chicago Boys were able to
implement the ideals, many for the
first time, of Friedman and the
Chicago School. The implementation
of these reforms, however, were
incredibly unpopular among Chilean
people, and were only enforced by the
U.S.-backed dictator, Augusto
Pinochet whom ended up killing
thousands, torturing tens-of-
thousands, and inspired the exodus of
The Chicago Boys
hundreds-of-thousands of his
opponents.

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 Impact in UK
The state of poverty

In pre-Thatcher Britain, about one Now one person in four, and one child
person in ten was classed as living in three is officially poor.
below the poverty line.

The state of tax cuts

During the 1980s, 1 percent of taxpayers received 29 percent of all the tax reduction
benefits, such that a single person earning half the average salary found his or her
taxes had gone up by 7 percent, whereas a single person earning 10 times the
average salary got a reduction of 21%.

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 Impact in UK
The state of (un)employment
By destroying the public sector where
unions were strongest, she was able to
weaken them drastically. Thus between
1979 and 1994, the number of jobs in the
public sector in Britain was reduced
from over 7 million to 5 million, a drop of
29 percent.

Since private sector employment was

stagnant during those fifteen years, the
overall reduction in the number of The unemployment rates were the second highest during the
British jobs came to 1.7 million, a drop of time of Thatcher, to the first being during WWII
7% compared to 1979.

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 Impact in US
The richer just got richer… and the poorer got poorer…
Over the decade of the 1980s, the top 10 percent of American families increased
their average family income by 16 percent, the top 5 percent increased theirs by 23
percent, but the extremely lucky top 1 percent of American families could thank
Reagan for a 50 percent increase. Their revenues went from an affluent $270.000
to a heady $405.000.

As for poorer Americans, the bottom 80 percent all lost something. The bottom 10
percent lost 15% of their already meagre incomes: from an already rock-bottom
average of $4.113 annually, they dropped to an inhuman $3.504. In 1977, the top 1
percent of American families had average incomes 65 times as great as those
of the bottom 10 percent. A decade later, the top 1 percent was 115 times as well off
as the bottom.

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 Impact in India?
• Today, the wealthiest 62 people on earth own as much wealth as the bottom half
3.5 billion, and the top 1% are more wealthy than the remaining 99%.

• An important reason for BJP’s 2014 general election victory was the promise of
stopping the corruption of UPA-1 & UPA-2 rule. Rather, following the UPA, public
funds continue to vanish as corporate debts (NPAs) are written off, and public
revenues from corporate taxes continue to be foregone in two successive NDA-2
budgets. Thus, neoliberalism has transformed corrupt regime into looting
machines, as elites manoeuvre to steal state revenues and acquire public assets.

• The effects of neoliberal policies were debt crises, severe environmental

degradation and crashing economies, currency collapse, rising unemployment,
rising food and fuel prices, and falling wages. The social ill-effects were
exacerbated by imposition of austerity measures of cutting subsidies for the poor
and reducing public spending on health, welfare and education.
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 Criticisms to Neo-liberalism
1. It creates too many financial hardships for citizens and the poor.

2. When a natural monopoly is privatised, the new capitalist owners tend to impose
monopoly prices on the public, while richly remunerating themselves. Classical
economists call this outcome "structural market failure" because prices are
higher than they ought to be and service to the consumer is not necessarily
good. 

3. The whole point of privatisation is neither economic efficiency or improved

services to the consumer but simply to transfer wealth from the public purse -
which could redistribute it to even out social inequalities - to private hands.

4. It moves wealth from the bottom of society to the top. If you are, roughly, in the
top 20 percent of the income scale, you are likely to gain something from neo-
liberalism and the higher you are up the ladder, the more you gain. 
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 Criticisms to Neo-liberalism
5. The creation of this neoliberal system has obviously entailed much destruction,
not only of prior institutional frameworks and powers (such as the supposed prior
state sovereignty over political-economic affairs) but also of divisions of labour,
social relations, welfare provisions, technological mixes, ways of life, attachments
to the land, habits of the heart, ways of thought, and so on - David Harvey

6. Critics argue that Neoliberal policies exacerbate, rather than mitigate economic
and social inequalities: They cite the effects of unregulated capitalism and the
reduction/removal of safety nets provided by the government(s) to support
economically and socially vulnerable persons.

7. Many critics assert that Neoliberalism fails to account for structural forms of
violence such as systemic poverty, racism, and other forms of discrimination:
They argue that these hinder equal access to the benefits of free market
capitalism that the Neo-liberals imply are universally shared.
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 People’s movement against Neo-liberalism
• Worldwide, spontaneous people’s grassroots movements opposed displacement
of populations due to mega projects and environmental degradation.
Governments viciously suppressed these.

• Neoliberal reform over decades has heightened inequality in European countries,

leading to economic near-collapse of PIGS (Portugal-Italy-Greece-Spain). The
consequent EU-wide political instability is greatly heightened by the flood of
immigrants from countries hit by armed conflict triggered due to neoliberal
exploitation. The UK voting 52% to leave EU is the most recent reaction to
neoliberalism’s negative impact.

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 People’s movement against Neo-liberalism
• In India, There are hundreds of on-going people’s movements, protesting the
proposed, on-going or completed infrastructure projects, or state and central
governments’ policies and laws which violate, deny or dilute people’s
constitutional rights and freedoms, in favour of corporate interests. Over the
years, intellectuals who consistently critiqued neoliberal policies were ignored,
defamed, branded as communists, suppressed or eliminated.

• Some examples of such movements are: DMRC Land Acquisition in Trilokpuri, Jan
Lokpal Anti-Corruption Bill, et. cetera.

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 Conclusion 1: Where was India during the global
Neo-liberalistic venture?

Main Objectives of New Economic Policy of 1991 (Dr. Manmohan Singh):

1. The main objective was to plunge Indian economy in to the arena of

‘Globalisation and to give it a new thrust on market orientation.

2. The NEP intended to bring down the rate of inflation and to remove
imbalances in payment.

3. It intended to move towards higher economic growth rate and to build

sufficient foreign exchange reserves.

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 Conclusion 1: Where was India during the global
Neo-liberalistic venture?

4. It wanted to achieve economic stabilisation and to convert the economic in

to a market economy by removing all kinds of unnecessary restrictions.

5. It wanted to permit the international flow of goods, services, capital, human

resources and technology, without many restrictions.

6. It wanted to increase the participation of private players in the all sectors of

the economy.

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 Conclusion 1: Where was India during the global
Neo-liberalistic venture?
Steps under the New Economic Policy
Free Market

• Free determination of interest rate by the commercial Banks.

• Freedom to import capital goods.

• Freedom for expansion and production to Industries.

• Abolition of Restrictive Trade Practices.

• Removal of Industrial Licensing and Registration.

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 Conclusion 1: Where was India during the global
Neo-liberalistic venture?
Privatisation

• Sale of Shares of PSU.

• Disinvestment in PSUs in losses.

Globalisation

• Reduction in tariffs.

• Long term trade policy, open competition.

• Partial convertibility of the Indian rupee for FII and FDI.

• Increase in Equity Limit of Foreign Investment.

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 Conclusion 2: How is neo-liberalism different
from the other forms of development?
The theory of neo-liberalism has to do with more about how the market needs
to function without the help of government intervention, and then translate
that to other sections of society, thereby stating, “privatise whatever possible”.

The other development theories have more to do with human development

theories, or with theories that look at modernising societies, or with the
translation of resources from the lower to the higher bracket. These theories
have nothing to do with economic development of any society.

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 Conclusion 3: Is economic development
achieved with neo-liberalism?
With the above examples, the simple answer is no. Neo-liberalism has only
achieved rearrangement of wealth from the lower bracket of society to a
wealthier and minor section of society.

However, the above point can be greatly contrasted by the huge unpopular
success in Chile (took place in a span of 20 years):

1. Chile’s GDP and labour productivity rose by more than three times.

2. Chile’s average life expectancy increased from 66 to 80 years and infant

mortality fell by 90%.

3. Initially, 4 out of 10 children did not receive education. Now, it is 0 out of 10.
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 Conclusion 3: Is economic development
achieved with neo-liberalism?
4. Chile’s poverty rate fell from 22% to 5%.

5. Chile scored 78 out of a 100 in the Healthcare Access and Quality Index as
opposed to a 59 earlier.

6. The HDI increased from 0.64 to 0.84.

7. There was a slight decrease in inequality from 0.56 to 0.43 (GINI coefficient).

But Chile is the only country where this theory was highly successful. This
cannot be conclusive to the question of economic development when we look
at the other examples from all over the world.

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 Conclusion 4: What was needed to make neo-
liberalism a more wholistic theory?
From the perspective of a planner, we know that development is not restrained
only to economic development. And that is what lacked in the theory. Neo-
liberalists never thought about the social and environmental impacts that
would’ve occurred due to this economic rearrangement. As the ideology was
not development of societies, it was simple maximisation of utility of the
wealthy class and industrialists.

Hence, as a planner, we can say that neo-liberalism is a theory that cannot be

made wholistic as the role of the state is removed. The government functions
ideally “for the people”, and if that aspect is removed, it will not be a completely
equitable distribution of resources, especially at a time when we are talking
about sustainability and equity.

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 References

1. Alfredo Filho, S., & Johnston, D. (2005). Neoliberalism: A critical reader. University of Chicago Press.

2. Bond, Patrick, and George Dor. "Neo-Liberalism and Poverty Reduction Strategies in Africa." Discussion paper, Regional Network for
Equity in Health in Southern Africa (EQUINET), 2003.

3. García, I. (2019). Historically Illustrating the Shift to Neoliberalism in the US Home Mortgage Market. Societies, 9(1), 6.

4. George, S. (1999, March). A short history of neoliberalism. In conference on Economic Sovereignty in a Globalising World (Vol. 24,
p. 26).

5. Harvey, D. (2007). A brief history of neoliberalism. Oxford University Press, USA.

6. Harvey, D. (2007). Neoliberalism as creative destruction. The annals of the American academy of political and social
science, 610(1), 21-44.

7. Majumdar, Ananda. (2017). Impact of Neoliberalism and Globalization. ABC Journal of Advanced Research. Volume 6, No 2.
141-148.
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Thank you for reading/listening :)