Neoliberalism

is a label for the economic liberalism which has become increasingly important in international economic policy discussions from the 1970s onwards.

In its dominant international use, neoliberalism refers to a political-economic philosophy that de-emphasizes or rejects government intervention in the domestic economy. It focuses on free-market methods, fewer restrictions on business operations, and property rights. In foreign policy, neoliberalism favors the opening of foreign markets by political means, using diplomacy, economic pressure and, for some neoliberals, military might[1]. Opening of markets refers to free trade and an international division of labour. Neoliberalism generally favours multilateral political pressure through international organizations or treaty devices such as the WTO, World Bank and ADB. It promotes reducing the role of national governments to a minimum. Neoliberalism favours privatization over direct government intervention and production (such as Keynesianism), and measures success in overall economic gain. To improve efficiency and minimize unemployment, it strives to reject or mitigate labour policies such as minimum wage, and collective bargaining rights. It opposes socialism, protectionism, environmentalism, fair trade, and critics say it impedes democratic rule. Likewise, these critics argue that labour rights and social justice should have a priority in international relations and economics.[citation needed]

In its US usage, neoliberalism is associated with some of these positions such as support for free trade and welfare reform, but not with opposition to Keynesianism or environmentalism. In the American context, for example, economist Brad DeLong is a prominent defender of neoliberalism, although he is a Keynesian, supporter of income redistribution, and fierce critic of the Bush Administration. In US usage, neoliberalism ("new liberalism") is commonly associated with the Third Way, aka social-democracy under the New Public Management movement. Supporters of the US version of neoliberalism present it as a pragmatic position, focusing on "what works" and transcending debates between left and right, despite new liberalism's similitude to classical centre-of-left economic policies (such as has been traditional to 20th century Canada). It emerged in the 1980s as an alternative to both the heavily interventionist approach of the Democratic Party and the heavily pro-business (and often anti-government) approach of the Republican Party. Its leaders included the journalist Charlie Peters, the thinkers Robert Reich and Lester Thurow, and the politicians Gary Hart, Paul Tsongas, and Bill Bradley.

The overlapping of these usages can create considerable confusion. In international usage, President Ronald Reagan and the United States Republican Party are seen as leading proponents of neoliberalism. But Reagan was never described in this way in domestic US political discussion, where the term is most commonly applied to moderate Democrats like the Democratic Leadership Council.


Background

The term "neoliberalism" is used to describe a variety of movements away from state control or protection of the economy and toward corporate control of the market, particularly beginning in the 1970s. The term neoliberalism is not the only one for this movement, its supporters argue that it is simply "liberalism," while critics (along with some supporters) often label it Thatcherism (United Kingdom), Reaganomics (United States of America), Economic Rationalism (Australia), Rogernomics (New Zealand) or Manmohanomics (India). Because of close association between this philosophy and neoclassical economics, and confusion with the ambiguous term "liberal," some advocate the term "neoclassical philosophy."

In its most uncompromising form, neoliberalism is an economic ideology centred upon the values of unregulated trade and markets, and the expanded business horizons provided by the end of the Cold War, or globalization. It argues that free markets, free trade, and the unrestricted flow of capital will produce the greatest social, political and economic good. This form advocates minimal government spending, minimal taxation, minimal regulations, and minimal direct involvement in the economy. The argument is that market forces will naturally fill many areas of jurisdiction for the highest overall gain. Detractors state that market forces are inherently not equitable. In the West, neoliberalism argues that the Welfare State should be dismantled and/or privatized. The thrust of this form of neoliberalism as part of globalization is to utilize the world's resources: cheap labour, raw materials, markets, in the most efficient way possible, and in doing so, to make more markets open to entrance by developed nations.

However, neoliberalism is applied to a much broader range of developments, not all of which are as closely associated with conservative parties. These include the shift from regulation to deregulation, the shift from corporate benefits to privately managed benefits, the move from low trade volumes mandated by the Bretton Woods System to high trade volumes in a floating currency environment utilizing comparative advantage to increase GDP and median wages. It is argued in this broader sense that the problem with under-developed countries is corruption related to the state interfering with adjustments in the market mechanism by, for example, subsidizing prices, setting wages, or picking winners and losers in economic development.

Central to the ideas of neoliberalism as opposed to the main competing foreign policy ideology, neorealism, is the belief that people and states are inherently good and cooperate as such. Neorealism on the other hand assumes that people and by extension states only act in self interest and sees possible interstate cooperation only through the lens of national benefit. Neoliberals are again more optimistic than neorealists in their belief of absolute gain (as opposed to relative gain). Deals between nations where both nations benefit but one benefits more are more likely to be approved of by neoliberals than neorealists.

Some portray neoliberalism as the imposition of free markets from the top-down, arguing that it has been promoted for the benefit of multinational corporations through the largest international financial institutions of the world-economy, namely, the IMF, WTO, and World Bank and by powerful core states, in particular, the European Union and the United States government. Because these governmental institutions advocate neoliberalism, many identify the policies with exploitation by corporations and the developed nations of less developed nations. The critics argue that these institutions do not promote development, but instead ensure the advantages and positions of the developed countries that dominate them. (See also Washington Consensus, Los Chicago Boys, Corporatism, Shock therapy.) Critics also protest the fact that neoliberal policies give multinational corporations economic power over democratically elected governments, as these corporations can use their abilities to withdraw or infuse capital (and therefore affect jobs and the economy) as political leverage.

Supporters of neoliberalism will state that rights over the flow of capital are essential for necessary market efficiency. They point to economic studies of the turbulence and shocks of the 1970s and argue that free markets will be more resilient in the face of such shocks, produce higher growth, better returns on capital and therefore more investment and development. They argue that binding other nations to the developed core will promote global stability, and eventually a turn to more democratic forms of government.

Contrary to what the name seems to suggest, individuals identified as liberals often oppose neoliberalism or do not support it entirely. Neoliberalism is not a version of the new liberalism of John Dewey, Woodrow Wilson, John Maynard Keynes, Franklin D. Roosevelt, or the British Liberal Democrats, which advocated limited intervention in the economy as a tool to benefit people.

"Neoliberalism" is often used as a pejorative; in this context it usually means not the economic theory, but the implementation of global capitalism and the power of multinational corporations, as well as the effects of free trade on wages and social structures.


Brief history


Just as the drive towards liberalization of trade and laissez-faire economics justified and encouraged the "first era of globalization", which came to an end with the shocks of the First World War, the collapse of the Gold Standard, and the Great Depression, neoliberalism is associated with the contemporary "second era of globalization," the seeds of which were planted after the Second World War. In between, during the period from 1915 until the 1960s or so, different versions of more statist liberalism and economic nationalism guided the economic and social policies of many nations. In mid-1950s, a book about the theory and practice of neoliberalism, recent German liberalism and the Federal Republic of Germany was published in the German Democratic Republic.

Neoliberalism's economic roots begin with the re-establishment of international monetary stability with the Bretton Woods system, which fixed currencies to the U.S. Dollar to gold. As an ideological movement, it became increasingly prevalent based on the work of Robert Mundell and Arthur Flemming. The Mont Pelerin Society, founded at about the same time by thinkers such as Friedrich Hayek, Milton Friedman, and Michael Polanyi created free-market think tanks and advocacy groups in the United Kingdom and the United States during the 1960s and 1970s. They drew upon the theories of the Austrian School of economics and monetarism. Neoliberalism argued that protectionism and government programs produced economic inefficiencies, and that developing nations should open their markets to the outside, and focus on exporting. Also emphasized was the liquidation of state-owned corporations, and the reduction in rules designed to hinder business. Neoliberal ideas found expression in a series of trade talks to form the General Agreement on Tariffs and Trade as well as regional free trade agreements such as the European Union and the North American Free Trade Agreement.

The slow and quantitative development of neoliberalism after World War II became more rapid in the 1970s, and not always by peaceful means. One of the often-touted neoliberal success stories is General Augusto Pinochet's Chile – which began with the violent ousting of the democratically-elected government of Salvador Allende. The Allende government had pursued radical left wing policies, and has been labelled "socialist" or "Marxist." "Free market" policies, including privatization of state assets, were imposed by "los Chicago Boys," Chicago school economists inspired by Milton Friedman. These policies were later imitated by the Bretton Woods institutions operating in many other poor countries, particularly in Latin America.

The rise of this wave of neoliberalism culminated with the Reagan government in the United States and that of Margaret Thatcher in Britain. The Reagan and Thatcher governments not only shifted their own countries' policies toward laissez-faire but used their control of the major Bretton Woods institutions to impose their policies on the rest of the world. For this reason, some regard neoliberalism as synonymous with the "Washington Consensus," the dominant policy view at the International Monetary Fund (IMF), the World Bank, and the U.S. Treasury at the end of the twentieth century and the start of the twenty-first. A major axiom of the neoliberal school is that (to quote Thatcher) "There Is No Alternative" to globalized capitalism. This slogan is often abbreviated as "TINA."

In the late 1980s and early 1990s neoliberal policies had been embraced by the conventionally-defined center-left, as Bill Clinton of the United States backed the North American Free Trade Agreement. Free trade was seen as essential to his economic program, which promoted the creation of technology and intellectual property rights as the means by which America would be able to reduce or manage its persistent balance of trade deficit. Some centre-left neoliberal economists argued that protectionism is not a left or right issue, but an issue of asymmetry, and therefore a general cause for concern. Neoliberal policies became adopted by several Third way parties, including New Labour in Britain, and the SPD in Germany. These governments opted for a continuation of the policies of the 1980s, arguing that they could be implemented in a more equitable manner that would produce greater social good, and bind the recently liberated communist states to the developed world economy.

Critics of neoliberalism in both theory and practice are numerous. This is particularly true in developing nations whose assets have been acquired by foreigners and whose underdeveloped domestic political and economic institutions had been undermined by the effects of being exposed to trade and rapid flows of capital. Even within the neoliberal movement there is intense criticism of how many developed nations have demanded that others liberalize their markets for manufactured goods, while protecting their own domestic agricultural markets.

Anti-globalization advocates are the most vociferous opponents of neoliberalism, particularly its implementation as "free capital flows" but not free labour flows. They argue that neoliberal policies encourage a "race to the bottom" as capital flows to the lowest environmental and labour standards, and is merely updated "beggar thy neighbour" imperialism, dating back 200 years. In this they are in fundamental agreement with many of neoliberalism's supporters who argue that neoliberalism represents an updated version of classical liberalism.

Some economists argue that neoliberal policies can create "moral hazard": governments and international financial institutions must bail out developing nations and their creditors because they are "too big to fail." This simply encourages further risk-taking and crises. They point to the string of currency melt-downs in countries such as – Mexico, Russia, Eastern Europe, East Asia and Argentina – as proof that there is a danger to allowing risk-taking without sufficient penalty or regulation.


Theory

As described by UC Berkeley economic historian and defender of neoliberalism Professor Brad DeLong, this "ism" has two main tenets:

"The first is that close economic contact between the industrial core [of the capitalist world economy] and the developing periphery is the best way to accelerate the transfer of technology which is the sine qua non for making poor economies rich (hence all barriers to international trade should be eliminated as fast as possible). The second is that governments in general lack the capacity to run large industrial and commercial enterprises. Hence, [except] for core missions of income distribution, public-good infrastructure, administration of justice, and a few others, governments should shrink and privatize."

To critics of neoliberalism, these two principles represent parts of the "trickle-down theory," i.e., that under free-market capitalism, economic growth and technological change benefit the poorest countries and people, even if ownership remains predominantly with the wealthier countries. Critics also claim that these claims are contradicted by the empirical record (see Practice, below). To defenders, "Development is Freedom" (i.e., free-market capitalism).[citation needed] More economic growth, specialization and opportunity create chances for individuals to achieve more than rigid structures which provide only illusory protection.

The concept of neoliberalism became popular among economists not only as the balance of political power changed (as discussed above), but as many decided that post-World War II national development strategies for poor countries were not having the intended effects. In particular, funding for mega-projects left poor countries with high debts but little growth to show for it. It is also a reaction to the perceived failures of populist and modern liberal economic policies, such as import-substituting industrialization.

Alleged failures of the East-Asian (Taiwanese, South Korean) policies of state-guided export-led economic growth and of the centrally-planned or "communist" economies also were interpreted as requiring neoliberal medicine. With the exception of the Chinese 'success', most centrally-planned countries fell apart economically and politically in late 1980s and early 1990s. China's market socialism has been criticized for developing towards crony capitalism, with closed markets, manipulated currency and stock prices and restrictions on imports, that has plagued many export-led economies.

As noted, the neoliberal doctrine is linked to the so-called "Washington consensus," a set of specific policy goals designed for Latin American countries. In addition to the tenets of neoliberalism noted by Professor DeLong, the Washington consensus stipulated that a country should have stable exchange rates and a government budget in balance.

While some use the terms neoliberal and libertarian or classical liberalism interchangeably there is a difference between the two philosophies. While both share a belief in market economics and free trade, neoliberal economics theory shares with neoliberal international relations theory (and liberal internationalism) a belief in international regimes and a degree of global governance as a means of negotiating and administering international agreements. Neoliberals believe that greater economic and political interdependence will lead to progress and a reduction of international tensions or at least divert states from utilizing military means to resolve conflict. Libertarians reject the neoliberal belief that global governance bodies or state negotiated treaty regimes that bind the individual are desirable.

Much of neoliberalism accepts macro-economic theory that assumes full employment and rational expectations, that is, it is a modern neoclassical and free-market economic theory. Others rely on the benevolence and technical expertise of the IMF and other international financial institutions to solve the world's economic problems.

Particularly radical versions of neoliberalism were recently adopted in Slovakia, Estonia and other former communist countries.


Practice

The practice of neoliberal ideas varies widely. Some proponents see transparency, development and uniformity of regulations as the most important goals, while many others see the dismantling of state regulations, as such, as the primary purpose. Many leading implementers of neoliberal policies criticize the manner in which those policies are implemented. Some blame the institutions such as the World Bank and IMF directly, while others argue that by the time the IMF and World Bank are involved, the problems have already become endemic – they blame the "shock therapy" approach which was taken in the 1980s for much of the economic damage, and argue that "big bang" marketization, such as was pursued in Russia, leads to centralized corrupt economic oligarchy, the very opposite of what neoliberalism proposes (though defenders point to the success of Estonia's and Poland's speedy reforms and the economic problems faced by slower reformers such as Moldova and Russia).

There were also catastrophic failures. In particular, Nobel prize winner and former World Bank chief economist Joseph Stiglitz argues that the IMF is guilty of forcing neoliberal and Washington consensus policy goals on countries at times when it was not appropriate (e.g., the Asian financial crisis), with devastating results. The "cookie cutter" approach of applying the same policy no matter what the specificities were can be seen in this crisis, as the IMF pushed for government budget cuts even though government budget deficits had nothing to do with the crisis. Neoliberalism has also been criticized by populists, social democrats, and anti-capitalists, who argue that unbridled market forces inevitably increase inequality in wealth and hence power.

Competing studies have been undertaken to analyse the economic effectiveness of neoliberal policy. These are the two most prominent ones:

Professor Robert Pollin, in a recent book, showed the neoliberal record on world economies compares unfavourably to development under the preceding era. Excluding the People's Republic of China, which did not follow the neoliberal lead, the era of the "developmental state" (1961-80) saw a per capita growth rate of real gross domestic product that averaged 3.2 percent per year. On the other hand, during the neoliberal era (1981-99) this growth rate fell to 0.7 percent per year, slowing both absolutely and relative to the wealthier countries of the OECD. China, which shifted from pure state planning to state-guided export promotion, saw its per capita growth rate rise from 2.5 to 8.4 percent between these periods. (See Robert Pollin, Contours of Descent, p. 131. ISBN 1-85984-673-4) Pollin also shows the rapid increase in income inequality between these periods [question: Intercountry inequality? or intracountry inequality?], especially when China is excluded from the sample.

Neoliberals counter that Pollin's research lumped both neoliberal and other anti-neoliberal countries in the same group and time period, hence it does not show the effect of neoliberalism for any single case (fallacy of composition).

Professors Jeffrey Sachs and Andrew Warner offer a counterstudy that examined 111 countries between 1970 and 1989 and separated the country's economic data into groups based on open and closed economic policy. They observed that in those developing countries that pursued open economic policies the income per person grew 4.5 % per year, whereas the number in closed economies was close to zero and in the developed countries 2.3 %. These empirical results are in line with the theoretical ones, where poorer countries are shown to have the follower's advantage, being able to import capital, technology and managerial practices.

The opponents to neoliberalism, however, counter that the study did not provide an adequate definition for open and closed economies when they divided the groups. Professors Francisco Rodriguez and Dani Rodrik wrote a paper to this effect.[1]


Who is a neoliberal?

As with many political terms, since the word is used in different ways by different groups, different people can be classified in different ways based on it. The most restrictive definition of neoliberal is "laissez-faire, capital market driven, privatization and trade arrangements." Under this specific form, neoliberalism is a business-conservative policy aimed at enforcing stringent budget discipline on developed and developing nations by requiring, for all but the US, balanced budgets and trade flows. This is based on a specific interpretation of the Mundell-Fleming model and is most associated with the Washington Consensus. In these terms the prominent neoliberals are people such as Steffen Gustavsen, Ronald Reagan, Margaret Thatcher, Robert Barro, and Alan Greenspan. [2].

In the broader sense, where a neoliberal is an individual who subscribes to Prof. DeLong's formulation of neoliberalism, any advocate of government restricted to supplying public goods, and globalized free trade is a neoliberal. By this broader definition Robert Rubin, Joseph Stiglitz and Amartya Sen are "neoliberals," even though all three have been highly critical of the neoliberalism of the more restrictive form, and the way institutions such as the IMF and World Bank have been run in the post-Bretton Woods era.

The key argument between these two usages can be seen from Stiglitz' criticisms of the Washington Consensus: namely, by the measures that he follows, that while globalization and global trade are good, they have been conducted in a manner that seems almost designed to impoverish poorer nations. He specifically cites agricultural subsidies and barriers, for example for sugar, the average prices paid for imports and exports between developing and core nations, and the damaging effects of "hot money" as the vehicle for foreign investment. For a laissez-faire neoliberal, other than an admission that agricultural subsidies are bad, none of these constitute indictments of laissez-faire policies.

One of the most prominent neoliberals who has not served as a government official is the journalist Thomas L. Friedman. His columns in The New York Times have consistently advocated liberal global trade, while also criticizing farm subsidies and advocating a stronger social safety net to protect workers who are negatively impacted by globalization. These sentiments are echoed in his books The Lexus and the Olive Tree and The World is Flat. Critical presentations can be found in Gerard Dumenil and Dominique Levy, "Capital Resurgent: Roots of the Neoliberal Revolution (Harvard University Press) and David Harvey, "A Brief History of Neoliberalism" (Oxford University Press).


Alternate definitions of neoliberalism

***** Government policy combining domestic free markets with coercive opening of foreign markets by political means

*******A philosophy that takes the conditions of the market to be the moral perfection of mankind and unconnected to efficacy of producing goods.

********The rule of the market entirely by microeconomic units and rejection of macroeconomic concepts and hierarchies such as the good of the state and society.

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MUKHTIAR SHAR

************@yahoo.com