Emergence Of Neoliberal Development Theory Economics Essay

Emergence Of Neoliberal Development Theory Economics raiseIntroductionThis essay aims to justify the emergence of neoliberal victimisation scheme by analysing the historical, political and economical backgrounds in the second half of the twentieth hundred and identify the key features of its success. Also, the essay aims to afford the reasons behind the failure of the Keynesian model that was dominant prior to the neoliberal possibility. Firstly, it will define growth, outline its origins and goals and cypher back at the history of suppuration to identify major theories prevailing in global economics. Secondly, it will account for the transition from the Keynesianism to neoliberal supposition and palisade that the main drawback of the former extensive resign intervention in economics was the reason behind the rise of the latter. Finally, it will analyse the neoliberal development theory in terms of its strengths and weaknesses and conclude with suggesting perspectives of the theory in the future.What is development?Development presents an elusive concept to define. As the term itself is incredibly broad, the simplest definition of Good budge (Chambers 1997) will non suffice factors such as time, perspective and focus should be considered to compass the term (Thomas 2000). Development does not happen overnight, therefore, to netherstand it we bring to look at a series of changes without history and the inevitable processes which accompany it. Secondly, understanding of development shifts dep caning on the vision or perspective of what development aims to achieve (modern society, maximum use of human potential or fixing the faults of progress). Finally, development could be seen as a focused effort to eradicate a problem (i.e. poverty, hunger, AIDS, etc.).Generally, development is summarised as a process of developing countries trying to catch up with developed countries (Kiely 2007). If we look at the current goals in development outlined by the Organisation for Economic Cooperation and Development (OECD), we can see that in developing countries by 2015Extreme poverty should be reduced by one half.Universal primary education should be ensured and gender disparity in education eliminated.Infant/child mortality should be reduced by two thirds and maternal mortality by three quarters.National strategies for sustainable development should be implemented (OECD 1996).On the surface these goals appear to tackle tender problems (quality of life and education) only when they are deeply intertwined with both politics and economics. In order to achieve those state leaders need to work along with inter home(a)istic organisations whose economic expertise can help to shape needed policies. No matter how noble these aspirations sound, it is the question whether they are realistic enough to implement that we should take in ourselves. It is possible to assess the chances of success better by looking back at the history of developm ent and its former achievements.The modern history of development begins with the end of the Second World War in 1945 when new states emerged and the old world(prenominal) order was reshaped. The key theme in development was expanding the economic growth through industrialisation. The unique position of the regular army after the war (minimal losses) facilitated its becoming a super post. Not only did it have an exceptional political influence in the international affairs but it also helped to promote capitalism and democratic values in Europe as well as the developing countries. The USA did this not only through opposed aid and direct investment but creating such international organisations as the UN, the IMF and the World Bank.The Cold War blood the world into two camps capitalist and communist. date the superpowers were trying to win more than political influence, they also helped to modernise developing countries by boosting their economies. Of course, it came with a pric e connection a camp of the donors. The USA supported national liberation of the colonies and promoted development of anti-communist ex-colonies. This period from 1950s to 1970s is also known as the golden while of capitalism. High pass judgment of profit facilitated high rates of capital accumulation and unprecedented economic growth, high productivity, high wages, expanding demand (Kiely 2007). Such growth resulted in full employment, creation of welfare corpse and a spread of globalisation.However, by the 1970s problems with the system became obvious states had monopolized important industries (coal, steel) which limited the capacity of economic growth, therefrom investment was dominated by political not economic reasons. Preston argues that there was an assumption that states have the right to intervene directly in production and statistical scattering (Preston 1996 p. 154-156). This resulted in capital not being allowed to cross borders without establishment approval, so states could set domestic interest rates, fix the exchange rate, tax and spend as they wanted to secure national economic objectives, moreover, the divide between developed and developing countries remained high (Leys 1996). The decline in profit rates recorded in the developed countries at the end of the 1960s deepened and in the 1970s spread into an open capitalist crisis, characterized by a swing of the whole system into monetary-financial chaos, exploding inequalities, and occupation unemployment (Herrera 2006).The Keynesian modelThe golden age of capitalism was dominated by the Keynesian development model, which maintains that the level of economic activity is determined by the level of aggregate demand (Palley 2004). John Maynard Keynes, the forefather of modern macroeconomics, argued that if markets were depoliticised, completely free from the intervention of governments, it would cause a period of economic depression and financial crisis. In order to prevent such a downfal l he suggested that governments should control fiscal and monetary policies. Within this theory unemployment could be explained through weakness in the aggregate demand generation process that capitalist economies are subject to.In the aftermath of the post war period it was this particular model that allowed states to redo and boost economies. A weak point, however, was the so-called spending ratchet governments provided additional support for workers during hard times but it was politically difficult to take them forth during a booming economy. Therefore, the rate of economic growth slowed down and the risk of inflation rose.This was not the only problem with the Keynesianism. According to Palley (2004) there existed two sub-theories about income distribution one originating in the USA, the other in the UK. American Keynesians advocated the neoliberal paid what you are worth theory of income distribution, while British Keynesians argue that income distribution depends signific antly on institutional factors. Palley then explains it in detail It meant that not only do a factors relative scarcity and productivity matter, but so too does its bargaining power, which is impacted by institutional arrangements. This explains the significance of trade unions, laws governing minimum wages, employee rights at work, and systems of social protection such as unemployment insurance. Finally, common understandings of the economy also matter, since a public that views the economy through a bargaining power lens will have greater political sympathies for trade unions and institutions of social protection (Palley 2004 2).In essence the two schools differed in their understanding of the factors involved in (simply put) wages and income. For example an American Keynesian, would view an employees bargaining power in wage negotiations as entirely dependent on demand for the employees skills, its relative scarcity and the employers ability to pay. The British view in however w ould encompass such additional factors as unions (in the case of employment) enforcing collective bargaining or national minimum wage structures. The British view therefore contained a more realistic accounting of income distribution versus a more pure capitalist view.One of the major factors of the transition from the Keynesianism to neoliberalism was the unstable prices for petrol in the OPEC in the 1970s. some other factor is of social nature the USA has promoted individualism that rejected the communist collective economic approach and kindled the debates in favour of free markets not controlled by the government. Combined with the divide between the train of Keynesian thought in the UK and the USA the theory slowly started to be replaced with neoliberalism.What is neoliberal development theory?Like development neoliberalism is a disputed notion. This term could be attributed to describe a theory of International Relations, an ideology, a development theory or economic theory. To avoid confusion we suggest a definition by HarveyNeoliberalismisatheoryofpoliticaleconomicpractices that proposes that human well being can best(p) be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong property rights, free markets and free trade. The role of the state is to create and preserve an institutional frameworkappropriate to such practices (Harvey, 2005 2).Neoliberal development theory has emerged in 1970s with the end of the golden age of capitalism. As the world economy was entering a recession, old strategies ceased to work and neoliberalism claimed to provide tools to overcome the financial crisis. The core of the theory lied in an assumption that heavy(a) policies were rooted in extensive governmental intervention in economics. Economic growth could be restored by policies ensuring competitiveness in the world economy. Neoliberal development theory aimed to enhance growth, create free m arkets, replace the Keynesianism that proved to be weak, and eliminate the intervention of the state in the economy that resulted in poor economic performance in many countries (Harrison, 2005). This approach was imbibeed by major international organisations such as the IMF and the World Bank which made the transition faster. This theory accumulated popularity as the USSR economic growth began to slow down in the 1980s and with the collapse of the Soviet Union, capitalism had proven to be a top-flight political-economic system to those that hadbeen its alternatives (Flew 2012).In order to understand what neoliberalism could offer that the Keynesianism could not Herrera (2006) splits the neoliberal strategies into domestic and international ones. They are both aimed at ensuring that the USA sustains and develops its hegemony. Firstly, at the national level, implementing the government control free economy by (1) deforming the structure of capital ownership to the benefit of the pri vate sector, (2) reducing public spending for social purposes, and (3) obligate wage austerity as a key priority in fighting inflation. Then, to internationally maintain the dominance of the American dollar with the help of the major international organisations and to promote free trade. This argument is in line with the Washington Consensus development strategies which included fiscal discipline, keeping inflation under control, welcoming foreign trade and investment, reducing the role of the government in general, and promoting new exports (Skidmore and Smith, 2005 59). As complementary to these goals, the Consensus also advocated tax reform including cutting marginal tax rates (reducing taxes for the rich), creating a unified and competitive exchange rate, and securing property rights (particularly for foreigners in developing countries) (Todaro and Smith, 2006 538). During the last 30 years this objective has resulted in the proliferation of neoliberal policies of deregulation, privatisation and marketisation (Cahill 2010).When portraying neoliberalism it is overriding to mention the basic principle of individualism. Neoliberalism implies that at the very heart of the concept lies the uniqueness of an individual that leads to subjective and self-centred preferences. Cahill (2010) argues that neoliberals base the defence of free markets on this liberty is depicted as a core aim of society in which markets embody spheres of voluntary exchanges between individuals. Based on the assumption that from reasonable point of view individuals would only engage in an exchange that was beneficial for them, markets allow them to satisfy preferences free from external interference or coercion. This way markets represent an excellent platform for spreading liberty. From the economic point of view free markets, with voluntary exchange at their core, let the preferences of rational self interested good maximisers to be expressed and satisfied. In this case prices repre sent markers of such preferences and along with the freedom of choice ensure that resource allocation is subject to the preferences. Such system leads to the claim of neoliberals that are not only moral but efficient means for producing and distributing goods and services. Freed from governmental involvement markets produce better results unlike when being under state control with politicians inevitably choosing one industry over another. It appears that better results could be achieved with a shift from the public to the private sector.Strengths/weaknessesIn order to establish if the transition to the neoliberal development theory was successful it is necessary to go back to the goals that the theory proponents wanted to achieve free trade, economic growth, liberalisation, depoliticising of economics and privatisation. While there is evidence that free trade facilitated economic growth it has been slower than expected and still connected with state intervention there is a decreed correlation between an economys exposure to international trade and the size of its government in the years from the 1960s to the 1990s (Rodrik 1998) and similarly whereas levels of trade and levels of government uptake are positively correlated, countries in which trade has increased more quickly in recent decades have experienced slower growth in government spending (Garett 2001).At the same time free trade and liberalisation has facilitated the emergence and development of globalisation opening new prospects of integration in the international economics and society. On the other hand, globalisation has its own drawbacks, especially in regards to developing countries they still have to catch up with more advanced states but the competition is a lot higher. Without modern technologies which are too expensive, tight budgets and a lack of mass production capability the developing countries, for example in sub-Saharan Africa, remain behind the western states or BRIC countries. Moreo ver, they have not achieved political freedom either the international organizations call on national governments to adopt neoliberal economic policies imposed from without while the globalized financial markets dispossess these states of their sovereignty and foreign core capital insinuates itself into the periphery countries capitalist ownership structure (Herrera 2006 5).Promoting body politic and liberalisation could mask more egoistic than altruistic reasons. Neoliberal reforms concentrate on achieving them at the expense of other important factors of development, such as environmental protection, human rights and most important elimination of global absolute poverty (Todaro and Smith, 2006 548).Conclusions and considerationsSumming up the explanation of the emergence of the neoliberal development theory we argue that although the theory has proven to be flawed, nevertheless, its world domination is justified and it is likely to continue its course in the future. While the K eynesian model was efficient during the post-war period and helped to make the economy, it could not provide the international community with the tools they needed to overcome the financial recession in the 1970s. The state-controlled economics framework could not accept and nip the free market and privatisation because it would mean losing a substantial part of political influence for the governments.Therefore, neoliberalism was the rational choice to adopt in order to revive the economy. As the major superpower (and after the end of the Cold War the unitary) the USA hegemony started to spread further the IMF, the World Bank and other international institutions promoted the development of neoliberalism in both developed and developing countries. Neoliberals believed that markets are able to manage and distribute capital better than states. For the developing countries it also meant more options for employment by expanding the outfit of exports.Conversely, the emergence, develop ment and finally establishment of the neoliberal development theory as the dominant one has created a number of issues that are complicated to resolve the siding gap between the rich and the poor, the slowdown of the economic growth and the recession. Promoting democracy and liberal values often hide states own interest, i.e. the war in Iraq in 2003, recent interventions in Syria and Libya. Although economy has become less state-oriented the goals of multinational corporations do not comprise of reducing poverty and inequality as their primary objective.In order to sustain the neoliberal model, it should be re-developed to provide better social security, lessen inequality and poverty, pay greater attention to human rights and create rightfully independent and unbiased institutions. Only then the 2015 goals of development could be achieved.