The Internet Encyclopedia of International Relations
Pure capitalism, neoconservatism, neoclassicism, and neoliberalism are all synonyms for the same set of economic principles. These were originally defined by Adam Smith, in 1776 when he coined the idea of a liberal economy and government in his book the Wealth of Nations (Kristol 258). Economic liberalism advocates for no government intervention in economic matters in essence, free trade. It is thought that no government controls will enable capitalists to make huge, unlimited profits. This was active in the United states throughout the eighteen and early nineteen hundreds. With the coming of the Great Depression in the 1930's economists in the United States agreed that capitalism needed government intervention in order to grow as well as to increase employment. Roosevelt incorporated the idea of government helping for the common good of the people or social welfare programs in his New Deal, thus ending, in the United States, capitalism without some form of government regulation (Martinez 1). However, in the past twenty-five years these old ideas have emerged with a new twist. Shrinking profit rates in certain parts of the world, particularly in Latin America and Africa, gave economists incentives to revive pure economic liberalism. Economists have given the prefix neo or new to the old principles of liberalism thus forming the word neoliberalism.
There are several main principles that embody Neoliberalism. First, neoliberal theory relies on the rule of the market to regulate the economy, allowing for a certain openness in trade, both globally and locally. Neoliberal theory allocates any restriction on basic market principles as a reduction in efficiency. An example of this type of global neoliberal policy would be in the North American Free Trade Agreement established in 1994 between Mexico, Canada, and the United States (Martinez 2). The purpose of NAFTA is to eliminate trade barriers among the three countries allowing for maximized profit. The rule of the market is characterized by a lack of government intervention and deregulation, which allows for no price controls, no minimum wage, and the de-unionizing of workers (Martinez 2). The idea is that corporations will pay higher wages and regulate themselves in order to attract workers and make a profit. Most importantly however, is the privatization of formerly government owned and operated industry including hospitals, communications, and banks. The idea behind the privatization of industry is to bring in foreign capital and investments in a developing economy to bring stabilization. In the past five years more than 1000 formally state owned operations were privatized in Mexico for that purpose (Martinez 2).
Market enablement characterizes local economies and their relationship with the central government according to neoliberal policy. Enablement requires the state's role in production , marketing, and regulation to be 'rolled back' and activities restricted to 'market enablement' (Burgess 141). Enablement means the use of market solutions. It is argued that this would stimulate entrepreneurship, skills and innovation" amidst growing local economies. Implementation of market enablement government relinquishment of the ability to control prices, exchange rates, interest, and
credit (Burgess 141). Mediation between local and central government is done through on-governmental Organizations. The NGOs enable the market by providing advice on standards and specifications as well as economic consultation (Burgess 142).
Market enablement is also coupled with political enablement in neoliberal policy. Political enablement is defined as "the transformation in the structure of the central government" (Burgess 144). It calls for a decentralization of powers granting more resources to local governments. Degrees of implementation are possible, including the strengthening local representation
all the way to local government being responsible for fiscal matters in the region which were formally allocated to state authority (Burgess 145). It is through political enablement that in many countries democratic rights were enhanced with increasing local representation to council meetings and such. The increasing democratization and decentralization is necessary for the free
market policies to be effective because it holds the business elite accountable for the needs of the local consumer, especially in urban development projects.
In the 1980's, economic growth in parts of the third world, particularly in Latin America and the Sub-Saharan Africa, were almost at a standstill. Falling prices, high interest rates, growing debts, decline in foreign capital inflows, and declining investment rates all contributed to the deterioration of
these economies (Burgess 17). Neoliberalism was viewed as the solution to help transition these economies to stabilization. Policies of export oriented economies were established eventually increasing the percentage of the total world manufacturing exports by these newly developing countries from ten to twenty percent by 1993 (Burgess 18).
Out of this economic crisis in third world countries also came Structural Adjustment policies or SAPs set up by the International Monetary Fund. The SAPs attempted to address poverty not with direct aid and government welfare programs, but rather indirectly. It was argued that liberalized
market forces would increase incomes as a result of savings, investments, and exports. They were based on neoliberal supply-side theories expressing the role of the market was to set wages ad prices. The SAPs basic goal was to restore the balance of trade within a country by offering almost a loan to increase trade investments. The Structural Adjustment programs relied heavily the removal of trade barriers, the devaluation of currencies, the deregulation of legal constraints on foreign investment, which is all part of neoliberal economic theory (Burgess 18). The World Bank and the
International Monetary Fund admit that in actuality many of the urban poor in these countries were
many times hurt worse by these programs. However, they insist the trade-off of economic stabilization will eventually filter down to the people now at the poverty level (Burgess 26).
Third world countries are not the only ones to attempt implementation of many neoliberal policies. Subtle incorporations of neoliberal theories have begun to creep into the polices of many of the already fully industrialized countries. In Japan, the Tokyo Round Codes enacted non-tariff barriers, the Nordic states have begun regional free-trade agreements, and the European Community has begun exchange-rate coordination through the European Monetary System (Baldwin 133).
One concern about implementation of strict neoliberal policies including market enablement, is the lack of concern for the environment. In Third World countries where the emphasis is on rapid growth ecological matters are secondary. Main causes of environmental degradation in many of the
newly developing countries include sewer and water problems due to the influx of citizens into the all ready over crowded cities (Burgess 72). Government regulation of company policies regarding
the environment is non-existent in neoliberal theory. Instead it tends to see government subsidies as the cause of the problem rather than a lack of government involvement. The subsidies are seen as simply creating public monopolies, unaccountable to users, which provide services with the least
amount of investment. Neoliberal theory also suggests under public subsidies there are no incentives to improve public housing. Whereas private ownership would create competition and desire for principle cost recovery as well as gains (Burgess 72). Neoliberal policies also suggest empowerment of local governments as well as non-governmental organizations to directly allocate funds for environmental reforms instead of the centralized government planning and financing (Burgess 75).
Neoliberalism, although a set of economic and political principles, was used by the United States in the early 1980's as a tool to politically shape third world countries away from socialism and towards an economy which better fostered democracy. In 1973, the CIA helped provide funding for the overthrow of the Allende government in Chile, which favored socialist policies (Foster 51). Pinochet emerged as the leader of Chile bringing the first real implication of neoliberal policies in any country. Pinochet used neoliberal policies to stabilize the economy and control hyperinflation
(Bosworth 398). The mass privatization of enterprises was implemented and by 1980 only 43 of 500 original firms were still under government regulation. Other reforms included freeing controlled prices, deregulation of domestic trade, and an overhaul of the social security system. The result was
significant growth in the Chilean economy by 1985 as well as successful development of long term capital markets (Bosworth 399). In 1984 the Office of Democratic Initiatives was also established. Its goal was to centralize and globalize democratization in countries of intervention by training legislators in the national parliaments, financing electoral tribunals, and sponsoring judicial reforms (Foster 51).
Neoliberalism embodies the spirit of classical laissez faire economics while placing a political spin on ideas. Neoliberal policies and theory is relatively new, only spanning the last twenty-five years as a way to stabilize as well as grow floundering economies. Neoliberalism has many critics at
all levels, but remains the major economic plan to increase economic growth and stability. With the increasing push for globalization and world dependency neoliberal policies arebeginning to be implemented among countries at all positions on the developmental spectrum.