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Critically assess the impact of neoliberalism on development

To critically assess the impact of neoliberalism on development, there is a need to be explicit about exactly what is

meant by the two concepts. While a variety of definitions of the concept neoliberalism have been suggested by different

authors, this essay will use the definition given by David Harvey in his A brief history of neoliberalism. Dag Einar

Thorsen describes the article by David Harvey as one of the few attempts made in recent 'critical literature' to provide a

broad definition of the concept neoliberalism [Thorsen 2009: 12]. "Neoliberalism is in the first instance a theory of

political economic practices that proposes that human well-being can best be advanced by liberating individual

entrepreneurial freedoms and skills within an institutional framework characterised by strong private property rights,

free markets and free trade."[Harvey 2005:2] The term neoliberalism literally means 'new liberalism' and it is often

expressed as the revival or rebirth of "classical liberalism"(which is described by Cerny as the renaissance of free

market economic theory) first proposed by Adam Smith in his book an enquiry into the Wealth of Nations.However

these two terms are not synonymous.In contrast to neoliberalism there is no role for the state. David Harvey defines the

role of the state in neoliberalism as existing "to create and preserve an institutional framework characterised by strong

private property rights, free markets and free trade [Harvey 2005:2]". Hence neoliberalism can be described as a sort of

imposed laissez faire[Cerny 2008:1]. The Bretton woods institutions were created to foster neoliberal globalisation. One

could say that this is it's raison d'être. The world bank is perhaps the most influential Bretton woods institution when

regarding development. This can be inferred from it's five main goals which Harrison adapted from Shihata’s work.

These goals are listed as follows: to aid in development and reconstruction, to promote private foreign investment, to

promote long term balanced international trade, to lend for project development, and to conduct it’s operations with due

regard for business conditions (Harrison 2004: 8). Neoliberalism consists of three main processes and these are listed as

follows: trade liberalisation, financial liberalisation and labour liberalisation. This essay will only focus on trade

liberalisation and finical liberalisation as it is impossible critically assess all three in any reasonable depth within the

word limit.

The term Development embodies a multitude of concepts, which makes the construction of a suitable definition rather

difficult. Development is generally understood to mean the sustainable enhancement of human standards of living,

improvement quality of life, the betterment of over all wellbeing and the amelioration of poverty across the population

of a geographical area [Thirlwall 1995]. Development is a process and as a result of this no country can be described as

fully developed. The link between neoliberalism and development is that neoliberalism is thought to lead to and foster

development. However there are some instances where neoliberalism as it is practiced today not only stifles

development but leads to a loss of welfare, and a reduction in general wellbeing in an area [Johnson 2005: 26].
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Any examination of the current impact of neoliberalism must be built on an understanding of neoliberalism as it is

practiced today. Neoliberalism promotes the liberalisation of international trade. This involves the removal of tariffs,

subsidies and other machines of protectionism to promote international trade around the world. The liberalisation of

international trade is thought to promote development, because the removal of tariffs, subsidies and other trade barriers

allows for countries to export goods and services more efficiently. An increase in exports as a result of the removal in

tariffs placed on exports by a foreign country will lead to an increase the gross domestic product (GDP) of the

indigenous country. This increase in GDP is commonly referred to as economic growth. Through the multiplier effect an

increase in the gross domestic product which is also known as national income is expected to trickle down to all

members of the population. The increase in income leads to an improvement in welfare and general wellbeing as

citizens of the indigenous country will be better able to purchase goods and services that will improve their living

standards. Also because tariffs and other barriers to international trade are removed imports are made cheaper. As a

result of this commonly consumed goods are less expensive. This means that the purchasing power of the citizens of the

country increase as they are now able to purchase more goods with the same amount of income. The people are more

able to satisfy their wants and needs, absolute poverty will fall and this is often described as a welfare gain. This has a

positive impact on development.

The above paragraph only tells one side of the tale. In current times "trade liberalisation" means that some countries

liberalise while some others do not. A clear example of this is cited by Francis Owosu in his article Pragmatism and the

gradual shift from dependency to neoliberalism: the world bank, African Leaders and development policy in Africa. He

advocates that the development of African states is dependent on improved access to markets in developed countries.

Regrettably the current subtext from the developed countries is "we subsidise, you liberalise". This is shown by the

severe protectionism practiced by some developed countries. It is estimated that Japan, the European Union and the

United States of America spend a whopping billion dollars a day trying to keep cheaper farm produce out of their

markets to safeguard their farmers from foreign competition. This is detrimental to development as it makes it almost

impossible for developing countries to grow economically via export sales [Owosu 2003:14]. Furthermore India and

China tend to be used as examples of the positive impacts that trade liberalisation can have on development as they

have both reduced the tariffs placed on imports and have experienced tremendous growth over the last decade. Average

Tariffs in India fell from 91 percent in the 1980s to 50.5 percent in 1990s and tariffs in China fell from 41.4 percent to

31.2 percent during the same time frame [Kiely 2005: 899]. However their tariffs still remain higher that those of most

other developing countries who have not enjoyed similar levels of growth. As a result of this one cannot attribute their

recent development to the liberalisation of trade alone [Kiely 2005: 899].

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Trade liberalisation is conventionally thought to reduce poverty through the process explained in the third paragraph.

However this argument overlooks the fact that developing countries that open up their borders to international trade are

forced to specialise in their comparative advantage because they can not compete internationally in any other industry.

As a result of this they often end up specialising in the production of primary commodities, such as agricultural

produce. The production of primary commodities (especially agricultural goods) is associated with diminishing returns

because they are income inelastic, this is known as primitivisation [Reinart 2007 ]. Countries that find themselves in

this category have the following characteristics: they are progressively marginalised in international trade, they

experience falling growth in exports, and the level of poverty tends to increase rather than decrease [UNCTAD

2002a:164]. In summary the liberalisation of trade is encouraging developing countries to specialise in poverty and as

Eric Reinart reminds us in his essay German economics as development economics, Keynes said 'the worse the

situation, the less laissez faire works'[Reinert 2004: 1]. Advocates for neoliberalism also fail to note that import

liberalisation can be brutal to indigenous industries in developing countries. This is because several local companies

may be put out of business as they lose their market share to foreign companies who have prices too low for the local

firms to compete against. In Brazil cheap imports led to a steep decline in the proportion of manufacturing value added

in GDP from 41 percent in 1980 to 27 percent in 2001. This contributed to a decrease in the number of people the

manufacturing sector employed. Between 1989 and 1997 over 1 million jobs were lost in the manufacturing sector. The

effects of the cheap imports didn't end there. Between 1994 and 2001 average real wages declined by 8 percent [Filho

2010:17]. This is clearly at odds with the definition of development and may be considered as a case where

neoliberalism acted as a retardant of development.

A cornerstone of neoliberal policy is financial liberalisation. The term financial liberalisation is generally understood to

mean "the deregulation of domestic financial markets and the liberalisation of the capital account" [Ranciere et al

2006:1]. Economic theory and real world experience both proffer financial liberalisation as a promoter of economic

development. When the deregulation of domestic financial markets occurs, controls placed on banks by the government

are reduced. Interest rates will no longer be determined by administrative means but by the market. As a result of this

real interest rates are expected to be positive. This is meant to lead to an increase in savings as a higher interest rate will

provide higher returns. The increase in savings will lead to a rise in bank capital. Banks will have more money to lend

and investors who borrow from the banks will have added pressure to invest their loans in more productive ventures.

This is expected to raise the general productivity of the economy. Economic growth rates will increase and this will lead

to more development [Pill et al 1997: 7]. Capital account liberalisation means that countries allow foreign capital

inflows into their economies. There are three distinct types of capital inflows and these can be listed follows: foreign
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direct investment, portfolio investment, and loan flows. The most stable of these is foreign direct investment. Foreign

direct investment is often described as the most advantageous capital flow because it leads to a direct increase in

investment and allows access to intellectual property [Schneider 2000: 4]. The direct increase in investment leads to an

immediate increase in the Gross Domestic Product (economic growth). Investment also helps increase the productive

capacity of the economy thus allowing for future development. Portfolio investment and bank loans from abroad

increase the capital firms have to invest and thus increase investment. However they are not as effective as Foreign

direct investment. They are also more unstable as they are more easily withdrawn. The benefits of financial

liberalisation are illustrated by Thailand. Between 1980 and 2001, in Thailand - "a liberalised economy", the Gross

Domestic Product per head increased by 148 percent while India - a "non liberalised economy"[Ranciere et al 2006:1]

saw it's Gross Domestic Product per head increase by a paltry 99 percent during the same time period [Ranciere et al

2006:1].

While several authors recognise the advantages of financial liberalisation, more often than not these same authors also

recognise the risk involved. Also, there are situations when financial liberalisation does not appear to work. In some

cases it actually has the opposite effect. For example deregulation of the Brazilian financial market was expected to

promote economic growth and development. It was expected to increase the levels of savings and make more funds

available for investment. However neither of these objectives were achieved. The savings rate fell by over 13 percent in

21 years from 28 percent of GDP in the mid 1980s to less than 15 percent in 2001. The investment rate on the other

hand fell 6.1 percent in 26 years from an average of 22.2 percent of GDP in the 1980s, to 16.1 percent in 2006. The

inflow of capital may also have crowded out savings, and this led to falling investment. The decline in the rate of

investment offers an explanation for Brazil's poor rate of growth. Between 1994 and 2008 Brazil's annual growth rate

was 3.2 percent per year and this is poor when compared to the average growth rate between 1933 and 1980: 6.4

percent per year [Filho 2010:17].

Foreign Direct Investment is generally thought to be good for development but at what cost? Developing countries

compete with each other for Foreign Direct Investment by making conditions in their countries more favourable for

trans-national companies. For example governments of developing countries are forced reduce the minimum wage,

overlook the exploitation of labour, allow environmental degradation, and give the trans-national companies tax breaks.

Each of these policy responses is detrimental to development as they reduce general welfare and induce the loss of

physical well being just for a few pennies. The reduction of the minimum wage means that employees get paid paltry

sums of money for ridiculous amounts of work. This leads on to the exploitation of labour, several developing countries

allow sweat shops that hire child workers to continue production. Environmental degradation has led to the loss of
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livelihood of several workers. Finally tax breaks reduce government revenue, making it more difficult for them to

provide much needed welfare. Clearly none of these are favourable for development. Governments are often held at

ransom to maintain these toxic conditions because they are threatened by the geographical mobility of the transnational

corporations and the world bank. This is often referred to as a race to the bottom[Silver and Arrighi 2001: 4-5]. The

world bank has been accused of aiding the race to the bottom on several occasions. Prayer 1982 is cited in Harrison's

book for declaring that the world bank "has deliberately used it's financial power to promote the interests of

international capital"[Harrison 2004:9]. Countries that do not conform to the conditions laid down by the World bank an

other Bretton woods institutions are threatened with being declared "off track". [Harrison 2004: 6]

One of the main negative impacts of financial liberalisation on development is capital flight. Capital flight refers to the

transfer of capital from poor countries to rich countries[Kant 1996: 5-6]. An example of this is when rich people in

poor countries acquire masses of foreign assets. Between 1973 and 1987 Latin America accrued 151 million dollars

worth of foreign capital assets. This was about 43 percent of the external debt accrued over the same period of time

[Pastor 1990:4]. In Africa, 25 sub Saharan African countries accumulated capital flight of 193 million dollars between

1970 and 1996. The cumulative capital flight exceeded their external debt by at least 14 million dollars[Boyce and

Ndikumana:3]. Capital flight has three main negative effects on a state and these are listed as follows: firstly capital

flight leads to a reduced growth potential as potential domestic investment is directed elsewhere, secondly, it leads to

the forfeit of tax revenue as assets and capital abroad cannot be taxed, and finally it leads to a poor distribution of

income [Pastor 1990:4].

In conclusion, while neoliberalism has some positive impacts on development, these positive impacts are out weighed

by the negative impacts. Also while it may be possible to achieve development through neoliberal globalisation, it may

not necessarily be the best means of achieving it. As Chang explains in his article kicking away the ladder, none of the

most developed economies today achieved their development through neoliberal means but through heavy

protectionism and strict government regulation of economic activities. For example Ulysses Grant an American ex-

president criticised the English who advised him to adopt free trade policies for America replied them saying, "within

200 years after America has got out of protectionism all it can offer, it too will adopt free trade." When America had

achieved development on par or even greater than that of the developed world it too started preaching and forcing free

trade. Chang describes this as kicking away the ladder[Chang 2002: 2]. This is what neoliberalism seeks to do. It seeks

to kick away the ladder that developed countries used to develop.

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Bibliography :

Alfredo Saad Filho (2010) 'Neoliberalism, Democracy, and Development policy in Brazil.' Development and Society

39:1-28

Benu Schneider (2000) 'Conference on Capital Account Liberalisation: A Developing Country Perspective.' Overseas

Development Institute June 2000

Beverly J. Silver and Giovanni Arrighi (2001) 'Workers North and South' , Socialist Register

Chander Kant (1996) 'Foreign Direct Investment and Capital Flight'Princeton studies on international finance number 8

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Erik Reinert (2007) 'How Rich Countries Got Rich... and Why Poor Countries Stay Poor' London:Constable

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International Benchmarking' How Rich Countries Got Rich. Essays in the History of Economic Policy. Working Paper

Ha Joon Chang (2002) 'Kicking Away the Ladder' Post autistic economic review, issue number 15 article 3
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Harrison G. (2004) 'The World Bank and Africa: The Construction of Governance states' London Routledge

Huw Pill and Mahmood Pradhan (1997) 'Financial liberalisation in Africa and Asia' Finance and development/ June

1997

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Indebted African Countries 1970-1996' Working Paper Number 5

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Owosu, F. (2003) 'Pragmatism and the Gradual Shift From Dependency to Neoliberalism: The World Bank, African

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