Problems with Neoliberalism

1. Problems with Neoliberalism • Introduction • Neoliberalism’s “success stories” • Neoliberalism’s prescription • Fiscal austerity • Privatization • Trade liberalization • Domestic market liberalization • Currency devaluation • Abolition of marketing boards • Retrenchment and deregulation

2. SAPs in Africa • overall growth slowed • agricultural output did not keep up with population growth • manufacturing did not increase its share of output • investment and consumption dropped • incomes declined • unemployment increased

3. African states • producing more primary goods for export • not increasing amount of processing by local industries • governments spend less on education, human-capital formation, creation and expansion of skilled laborers, managers, and engineers • likelihood of future industrial development severely curtailed

4. “Declining terms of trade” • successful development occurs when countries not only increase exports, but alter composition of exports • develop and build export industries • future revenues need to come from new industries • neoliberalism does not promote industrial capacity • impossible for states to transcend “declining terms of trade” • improving living standards of first-world at the expense of the third

5. Fiscal austerity • reductions in government spending • does not necessarily lead to economic growth • neoliberals put too much faith in market • government spending can often complement private spending • neoliberal belief “openness” is enough to attract foreign investors is wrong • demand compression can have significant negative consequences

6. Privatization • selling-off of formerly public, state-owned firms • state only institution that can address market failures or deficiencies • public firms provide benefits unlikely to be taken up by private interests (e.g., human-capital formation) • little evidence private firms necessarily more efficient than public ones • sectoral reform rather than strict privatization • reducing public sector does not necessarily improve development

7. Trade liberalization • eliminating or reducing restrictions on imports • world economy dominated by highly protected and subsidized economies of first world • poor economies do not fare well • do not have developed industries to take advantage of improved access to foreign markets • cheap imported goods discourages local entrepreneurs from moving into industry • impact depends on stage of economic growth • most effective in relatively industrialized economies

8. Domestic market liberalization • eliminating price controls and marketing boards • farmers will not respond to price increases unless they have access to good transportation infrastructure and inputs (affordable credit, cheap land and labor, subsidized seed and fertilizer) • state assists in transition; government-sponsored research and development needed • governments assist in development of markets and capital • responses to price are greater in more-developed than less-developed economies • in least developed economies, states have to intervene to make domestic market liberalization beneficial

9. Currency devaluation • hurts urban industry • shifts society’s revenue; profit-earners and export-crop farmers better off • may reduce overall consumption and cause economy to shrink • little to stimulate exports • positive in economies with strong industrial bases • undercuts prices on goods sold by competitors in other third-world countries • chief beneficiaries are consumers in first world

10. Abolition of marketing boards • increasing prices for primary good exports, increasing production • doesn’t necessarily liberalize domestic markets • markets tend to be distorted • position of farmers can be relatively weak • re-regulation may be more beneficial than deregulation • marketing goods avoided by private traders • market integration through uniform national standards even out differences in highly segmented markets • price stabilization encourages farmers to grow export crops that earn foreign exchange

11. Retrenchment and deregulation • “crowding out” vs. “crowding in” • financial deregulation • labor market deregulation • corruption

12. “crowding out” vs. “crowding in” • not all government spending “crowds out” private investment, some “crowds it in” • public investment sometimes key determinant of growth in agriculture • reducing education spending -- future growth in world trade may favor goods with higher human-capital content than past, slow country’s development

13. Financial deregulation • can raise credit costs • yields few gains if institutional framework to mobilize domestic savings inadequate • effective re-regulation preferable to blanket deregulation • state interventions promote local credit institutions and competition • deregulation worsens income and wealth distribution • state banks provide credit to small and medium-sized entrepreneurs who suffer from lack of access to credit

14. Labor market deregulation • expected to depress wage rates by reducing controls • lower wages attract new investment and increase employment • if wages drop too low, local demand drops, reduces demand for local firms’ output and erases gains • finding optimum level -- firms preserve their advantages on local and international markets -- may require wage regulation

15. Corruption • assume rent-seeking is economic and top-down • may emerge from society rather than state • bottom-up and political, competition for power and resources controlled by state • rolling back state does not reduce rent-seeking but drives up prices of resources or positions of power • reducing size of state may make competition for resources sharper and potentially more violent