What are the Strengths and Weaknesses of the Neo-liberal Approach to Development?

Neo-liberalism is a modern economic and political philosophy generally associated with some of the policies and philosophies implemented by many of the major democratic countries during the 1980s and 1990s. It must be noted, however, that there is not one commonly agreed upon, concise definition for neo-liberalism. In fact, over the past ten to twenty years, the term has tended to become used in a pejorative way by those who are criticizing some of its characteristics and effects. One of the most common views of neo-liberalism associates it with Reagan and Thatcher’s political policies related to de-regularization and privatization. While the term, itself, which became highly politicized in political discourse, is now viewed in a negative light, there are and have been strengths and weaknesses of the ideology in the context of development. Interestingly, some countries have flourished under ideas and laws espoused as those falling under the neo-liberal umbrella, while other countries have floundered. Examples of both show some of the positive and negative characteristics of the ideology in real-world practice.

In order to fully understand the positive and negative impact of neoliberalism development policies, it is helpful to understand the foundation of this economic philosophy. The term was used by German economists and political theorists to describe a combination of a market economy with a liberal economy, which was described as a “third way,” between fascism and communism. The early 1930s was a dark time because of the collapse of the world economy. In Germany, especially, the ideas of liberalism of any kind were unpopular as the economic situation in Germany was particularly grim. One of the few German intellectuals who didn’t lose their faith in liberalism, however, was Alexander Rustow. A former advisor in the Ministry of Economic Affairs, he opposed the collection of power in the hands of a few and ended up changing political sides. He became disillusioned with the idea of central planning and began to teach that it was incompatible with liberty. Rustow frequently went back and forth between ideologies of socialism and those of liberalism. His constant, though, was a continuing skepticism of government power. He is thought to have popularized the term “neo-liberal” among his German colleagues and even eventually got several other intellectuals to agree to use the term to describe their movement (Hartwich 2009).

When he discussed neo-liberalism in a speech—thought to be the founding document of neo-liberalism—he titled it “Free Economy, Strong State.” He warned that the government shouldn’t be required to solve every problem and that an excess of intervention is what caused the economic crisis of that day. His vision was that of a strong state that had only a few rules or regulations, but that effectively implemented and enforced them (Hartwich 2009). He and his contemporaries also separated the idea of the liberalization of the economy—allowing actors to freely interact, from the idea of the government taking a laissez-faire approach—which they tended to think would lead to big corporations stifling the ability of small actors to act freely within the marketplace. This is a big divergence from the way most modern scholars describe neo-liberalism today (Boas & Gans-Morse 2009, p. 143).

Some other German intellectuals criticized the neo-liberal ideology as it was envisioned during the 1940s and 1950s: the Catholic theologian, Edgar Nawroth, for example, said it would lead to selfishness and a focus on materialism, which he felt would undermine the cohesion of the German state (Thorsen & Lie 2011). This point of view, perhaps, began the trend of critiques that have been made throughout the years on the neo-liberal philosophy.

Another early modern usage of the term was in 1950 by Jacques Cros in his doctoral thesis: “Le ‘neo-liberalisme’ et la revisione de liberalisme” (Thorsen & Lie 2011). In effect, he equated the idea with a return to a more classical liberal economic theory: one that distrusted totalitarian regimes and espoused more laissez-faire economic views than those of Keynes. His discussion of the philosophy included a skepticism related to their central belief that a free-market economy is necessary for or is equivalent to individual freedom.

The most common usage of the term neo-liberalism refers to economic reform policies. These tend to “liberalize the economy” by doing away with price controls, reducing the number of regulations restricting capital markets and reducing trade barriers (Boas & Gans-Morse 2009, p. 142). They can also refer to a movement toward privatization—or reducing the influence or control of the government in certain industries. The term has also been used to refer to economic policies that implement austerity measures and focus on reducing deficits and streamlining government budgets (Boas & Gans-Morse 2009).

Cahill suggests that there has been a clear correlation since the 1970s between economic policies that tend to promote deregulation, marketization and privatization (2011). He points out that these processes relate to a “freeing” of sorts: though that freedom relates to the freeing up of capital and the reduction in constraints on movements in economies.

Importantly, there was a shift around the time of the 1970s and 1980s in the philosophy of the GATT and the WTO. Prior to that time, its role was seen to be hands-off when it came to domestic regulations—even those affecting international investment opportunities. Then there was a shift toward a view of the world economy as a whole, and of states as players within that economy. From this frame of reference, the GATT/WTO became less concerned about allowing local governments to control their own purview within the realm of what was considered to be “normal” activity and became more concerned about protecting economic interests from the interference of states (Lang 2011, p. 18).

Many who would be considered to be modern social and political liberals have criticized neo-liberalism because they point out that it is primarily multi-national corporations that profit from the neo-liberal trade and development policies of the 1980s and 1990s. By reducing trade barriers, reducing regulations, and privatizing many state functions, the international community seemed to be stepping out of the way of big corporate interests. A lack of regulation is seen as a way for those who currently wield a great deal of power to be able to wield it unfettered.

In the 1960s, during the Latin American incorporation crisis, a group of Latin American intellectuals—particularly in Chile—began to discuss and promote the pro-market ideology of neo-liberalism as espoused by German intellectuals. If one looks at the articles published by pro-market advocates in Chile at that time, the ideology as explained by them is closely aligned with the German definition of neo-liberalism—that is, a policy that allows for freedom of action within a marketplace, while protecting the freedom of the small actors from the overwhelming power of the large actors in that economy (Boas & Gans-Morse 2009).

The Chicago School of Economics, including the thinkers Milton Friedman and Hayek, had a profound impact on the ideology of the Chilean intellectuals in the 1950s and 1960s. In 1955, a group of Chilean intellectuals, later nicknamed the “Chicago Boys,” was invited to the University of Chicago to study directly under Friedman. They were also influenced by Hayek during that time period. Once they returned, they set up think tanks and began publishing articles related to their economic theories. By the time of Pinochet’s coup in 1973, their ideology had become ingrained in the right-wing intellectual ideology of Chile.

By the 1980s, the neo-liberal label began to be used more within a critical context of economic and political ideologies than otherwise. Pinochet’s regime in Chile during the 1970s and 1980s enacted many radical policies considered to exemplify the neo-liberal agenda, including privatization, a decrease in the state’s social expenditures and a reduction in trade barriers. The totalitarian regime, however, also cracked down on unions and labor organizations, using the military to imprison, torture and execute those who opposed the government’s policies (Cahill 2013). The sweeping reforms of the later 1970s; the speed at which privatization occurred; and the generally acknowledged lack of concern for those the new policies harmed—including many landowners and capitalists—meant that Chile’s version of neo-liberalism came to be seen as a very radical one.

Intellectuals began to describe neo-liberalism in terms of Chile’s radical reforms and as an ideology that separated political freedom from economic freedom. The reforms were in part a response to the socialist policies that had been enacted under President Salvador Allende’s regime (the leader of Chile who was toppled by Pinochet). So the Chilean form of neo-liberalism was—at least in part— a practical reaction to those policies. Additionally, the term neo-liberalism came to be associated with many of Pinochet’s militaristic and dictatorial methods of enforcing the new economic regime, which necessarily was a negative association for many intellectuals.

Today, the term seems to loosely be associated with a political-economic ideology that proposes the restraint of government interference in the marketplace and, thus, a correlative economic freedom of the actors in that economy. There are so many different forms of this idea that have been implemented in so many different ways and are associated with the term neo-liberalism, that the ideology has come to be dissociated with any particular political party or regime.

Reagan’s involvement in the air traffic controller strike of 1981, in which he fired members of the Air Traffic Controllers’ Organization and imprisoned its leaders and Margaret Thatcher’s use of police and the secret services to interfere with the National Union of Miners are both seen as examples in which governments used the coercive powers of government to implement and enforce neo-liberal policies (Cahill 2011).

It is interesting that many in the world look to the growth of the U.S. economy in the 1990s as the shining example of the positive effects of neo-liberalism on an economy. While the U.S. did achieve unprecedented growth in its economy during the 1990s, if one looks more closely, one can see that those policies led to an extremely unstable economy, that seemed to be waiting to topple. In fact, the ideology of neo-liberalism has had a variety of setbacks, including the Savings & Loan crisis, the Asian Financial Crisis, the Dotcom crash and the Long Term Capital Management Fund crisis, in addition to the latest collapse of the world economy as a result of the sub-prime mortgage and financial institution market failures. Cahill argues that in reaction to each of these crises, states have re-legitimized or redefined neo-liberalism in various ways, but have ultimately institutionalized it (2011).

There have been very politically active and vocal opponents of neo-liberalism, which has led to a rollback in some policies. The most extreme example of this is in Venezuela (Cahill 2011). Additionally, in response to the latest financial crisis, many politicians have proclaimed an end to a hands’ off approach to government involvement in state economies. Pres. Nicholas Sarkozy famously pronounced that “Laissez faire is finished” (Cahill). Looking more closely at many of the governmental solutions that have been implemented in response to the crisis, one notices that much of the government intervention has pumped money into private corporations, as opposed to a government takeover of those institutions. Even the Obama health care program is not a government-run insurance system but is a government subsidy for private insurance companies. In this way, some of the fundamentals of neo-liberalism continue as almost a given characteristic of modern economies.

In conclusion, we see that the ideology of neo-liberalism is not easily defined and has changed in meaning over time. Many of the ideas relate to the minimization of government regulation or interference in the marketplace. There has been a wide variety of economic failures that have seemed to show the weaknesses of the ideology: including the Savings & Loan crisis, the Asian Financial Crisis, the dot com crisis, the Long Term Capital Management Fund crisis, and the latest financial crash. Additionally, the association of neo-liberalism with Pinochet’s totalitarian regime and enforced privatization has meant that the term has many negative associations attached to it. The strengths have been the subject of proponents and include the idea that economic freedom from government intervention is a form of individual freedom that ought to be preserved and protected. Regardless of the fact that the term neo-liberalism is generally described in a pejorative way, the basic ideology behind it persists in some form or another in today’s economies.

Reference List

Boas, TC & Gans-Morse, J 2009, ‘Neoliberalism: From new liberal philosophy to anti-liberal slogan’, Studies in Comparative International Development (SCID), vol. 44, no. 2, 137-161.

Cahill, D 2011, Neoliberalism, Crisis and the Socially Embedded Economy, University of Sydney: Political Economy Department, Sydney. [online] Available from: <http://sydney.edu.au/arts/political_economy/downloads/Damien_Cahill.pdf>. [24 October 2013].

Hartwich, OM 2009, ‘Neoliberalism: the genesis of a political swearword’, CIS Occasional Paper 114, New South Wales: The Centre for Independent Studies (CIS). [online] Available from: <http://www.ort.edu.uy/facs/boletininternacionales/contenidos/68/neoliberalism68.pdf>. [Accessed Date: 24 October 2013].

Lang, A 2011, World trade law after neoliberalism: reimagining the global economic order, Oxford University Press, New York.

Thorsen, DE & Lie, A 2011, ‘The neoliberal challenge: what is neoliberalism?’, Contemporary Readings in Law and Social Justice, vol. 2, no. 2, pp. 188-214.