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To What Extent Does the Spread of Neo-Liberal Economic Policy Provoke Violence and Conflicts?
Master Thesis
Name: Marina Aleksandrova 2188376
Address: Albertine Agnesstraat 2, Groningen 9717EV, the Netherlands Cell-phone: 0643464034
Supervisor: Dr. B. A. Herborth
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Table of Contents:
I. General Introduction ………. 4
II. Chapter 1: “The Backlash Effects of Neo-liberal Economic Thought” 1. Introduction: Structure of the Chapter ………... 7
2. Definition of Neo-liberal Economics: Main Features and Goals …... 7
3. Critical Review of the Neo-liberal Economic Thought: 3.1. On Profit and Growth ……… 9
3.2. On Profit and Peace ……….16
4. Conclusion ………. 25
III. Chapter 2: “The Backlash Effects of Neo-liberal Economic Policy” 1. Introduction: Structure of the Chapter ………. 27
2. Analysis: 2.1. The Backlash Effects of the Neo-liberal Economic Order: How the Inequality Gap Between and Within Countries is Expanding …... 28
How the Power Flows to Certain Actors ………. 33
Cultural Pressure as a Form of Social Inequality ………. 38
2.2. General Critique, Reforms Propositions and Nowadays Reality: General Critique ………. 40
Propositions ………... 41
Analysis on the Propositions ……….. 43
3. Conclusion ………... 45
IV. Chapter 3: “The Inequality Gap and Relative Deprivation theory on the Causes for Conflicts.” 1. Introduction: Structure of the Chapter ………. 46
2. Definition and Main features of Relative Deprivation Theory ……… 46
3. Analysis: 3.1.Criticism, Tests and Evidence: Re-evaluation of the Concept Evidence ………. 49
Contra-evidence ………. 52
Bias in Most of the Evidence/Contra-Evidence ...………... 54
3 4. Conclusion ……… 60
V. General Conclusion ……….. 61
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I. General Introduction
Existential questions asked in the international relations’ discipline have been whether free trade promotes cooperation and mutual interests, reduces inequality and thus leads to peace in the system. Main topics discussed in developmental studies, on the other hand, have been
focused on how to allocate resources, what is the best policy that brings progress, prosperity, and economic growth to countries and people.
The dominant view of how to achieve all of those goals has been promoted and applied by the West and particularly the USA as the path to development and as the most efficient way to boost one’s prosperity, eradicate poverty and ameliorate conflicts. Neo-liberal economic theory
is what stands behind this incorporated policy, throughout the world.1 Fukuyama’s claim that
capitalism is the end of history might be overstated, yet global capitalism is still the prevailing trend.2
After phenomena like the economic crisis of 2007 and the 9/11 terrorist attack, however, academic circles have gone into kindled debates about the pros and cons of neo-liberal economic model and policy. Critical theorists and political economy findings have considered that those policies have backlash effects. They have argued that the western economic model causes
dependence instead of interdependence, it has been ignorant of national and cultural implications and that it has further expanded the inequality gap between and within states. Thus two “camps” have formed. The scholars and economists standing behind the policy of the World Trade
Organization (WTO), the International Monetary Fund (IMF) and the World Bank (WB) in defence of neo-liberal economy and the above mentioned academics who are skeptical of the idea that such order brings peace and prosperity.
This master thesis explores the presented possibilities. Its goal is to find to what extent the spread of neo-liberal economy provokes violence and conflicts. It examines to what extent the neo-liberal economic ideology fails in its claims to achieve peace and prosperity. It also traces to what extent the policy and practices of neo-liberal economy lead to the presented negative outcomes. Consequently the main hypothesis is that neo-liberal economic ideology and policy
1
Leandro Vergara, Lecture on Economy and International Development, IPE seminar, RUG, Feb 2012.
2 Scott Burchill, “Liberalism”. In Theories of International Relations, edited by Scott Burchill, Richard Devetak,
5 have expanded the social, income and power inequality between and within states, producing a breeding ground for conflicts.
Some academic work researching the link between conflicts and economics has been focused onto how the former affects the latter. Other literature has examined how the absolute socio-economic deficiencies within countries translate into violent conflicts. This paper, however, looks at the problem from different lenses in order to add to what is already known about this subject. It traces the opposite link, from economics towards violence. It also expands on both micro and macro-level researching neo-liberal economy’s shortcomings. It focuses on relative comparisons of inequality as a breeding ground for violence. Moreover, most criticism towards neo-liberal economics has focused just on the prosperity and growth shortcomings. This paper aims at contributing to the present academic work, through expanding on the links between the neo-liberal economy, violence and conflicts. Yet, a remark is added that the link stated in the hypothesis is not mono-causal. Constraints also follow from the complexity of the analyzed issue, which involves a multitude of interacting factors. Nevertheless I believe that the
underpinnings of this thesis might contribute to a better understanding of the effects caused from the globalization of the world economy.
This thesis is based on a systematic analysis of secondary sources. Critical review of liberal economic thought promoted by the World Trade Organization versus critical theory and political economy findings are presented. In the last part of the paper Relative Deprivation theory is analyzed in order to trace whether inequality is a breeding ground for violence and conflicts. Chapter 1 explores to what extent the neo-liberal economic thought involves shortcomings that do not allow its ideology to succeed, leading to problems concerning both prosperity and peace. It examines the validity of the neo-liberal claims that the model promotes peace, growth and wealth. This chapter traces the main arguments in defence of neo-liberalism. It evaluates the theory concerning free trade as promoting cultural interactions, understanding, mutual interests and conflict reduction. It questions neo-liberal argumentation on development, growth and inequality. Neo-liberals use concepts from the classical liberalism literature to support their framework. I analyze the work of Adam Smith , W. W. Rostow Norman Angell, Patrick
6 Chapter 2 is focused on the policy of neo-liberalism and its shortcomings. Structural
adjustment programs concerning resources allocation in the South and promoted by the WTO are also researched there. Critical political economy is contrasted to the neo-liberal project defended in Chapter 1. It shows how through implementing the researched model profits and power have become further concentrated into the hands of the USA, some private actors in the financial sphere, and the main economic institutions such as the WTO, the WB and the IMF. With the rise of neo-liberalism multinational corporations and private military companies have become very powerful agents on the global scene. Some scholars argue that the rise of those agents has been at the expense of the Global South which has been exploited by the North. According to Gregory Hess nowadays neo-liberal market structure is at the advantage of importers who gain from contested resources, at the expense of exporters. This chapter also expands on the work of Gerard Dumenil, Dominik Levy, Walden Bello, Philip McMichael, Michael McKinley, Karl Polanyi, John Rapley, Amory Starr, etc.
While Chapter 1 and 2 aim at proving that the inequality gap between and within states has expanded Chapter 3 answers the question how exactly does inequality and violence relate to each other. The hypothesis laid there is in conformity with the Relative Deprivation theory which explains what factors contribute to excessive violence through a perception of inequality. It assumes that political attitude, values and action are motivated by relative deprivation of
something that the others have. Thus the exacerbating of inequality and the welfare gap between rich and poor may prove provocative to the non-western world, adapting it to extremism.
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II. Chapter 1: “The Backlash Effects of the Neo-liberal Economic Thought” 1. Introduction: Structure of the Chapter
This chapter explores the main features of neo-liberal economic theory and to what extent it brings economic growth, contributes to development and peace. First a definition and
explanation of the main goals and features of the neo-liberal project is given. The purpose is to research whether the stated motives and the presented positive effects are supported on a
theoretical level. Thus the ideological basis of the new economic order is analyzed in section two and three in order to see to what extent it is justified by the WTO.
The second section is focused on the relation between neo-liberal economy and profit. It researches to what extent neo-liberalism promotes economic growth, and reduces poverty. Neo-liberals use concepts from the classical literature on liberal economics to support their framework. Therefore I analyze the work of Adam Smith and W. W. Rostow in order to see their relevance in today’s world. The focus and main criticism is on how those insights are used today by the WTO, IMF and the WB. Economies are no longer confined to national terms, markets do not seem so natural anymore, comparative advantages can be constructed and profits flow away from the common good. Rostow’s one way path to prosperity for every nation ends with the era of mass consumption. Now we are living in the era of financialization. What implications follow from that is also mirrored in the second section.
The third section explores to what extent neo-liberal economy enhances peace. Again the focus is on classical literature or research that is based on such. And again the reason is that behind the neo-liberal ideology stay classical texts on the relation between commerce and peace. Thus this section critically assesses the work of Norman Angell, Patrick MacDonald, John Mueller, Erich Weede, etc.
2. Definition of Neo-liberal Economics: Main Features, Goals and Historical Origin This form of economic establishment embodies market-led development, promotion of
private property and services, deregulation of labor and capital globally.3The position defended
is that this policy redistributes scarce resources in the most effective way and thus brings
3 Phillip Anthony O’Hara, “Contradictions of Neoliberal Globalization: the Importance of Ideologies and Values in
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prosperity to all.4 By reducing public services provided by the government inflation decreases
and national budget increases.5 State’s role is only to provide legal frame in order to ensure
protection from abuses. Individual self-interests and self-incentives like investment in
innovations are perceived to be the driver of the economy and to bring most efficiency. Those who innovate their products or services and provide best value for minimal cost will prosper. There is no space for ineffective businesses. Thus competition between private initiatives leads to progress or “creative destruction”. This logic proceeds with the idea of reduced state’s control over the market so that to ensure this progress. Social governmental programs are rendered ineffective because they increase inflation, and decrease the strife for competition and constant upgrading. This competition is best expressed when there are no trade barriers and the whole
process of investment and capital flow is turned into a global phenomenon.6
Some of the concepts followed by the WTO, the IMF and the USA are derived from
interdependence theory, liberal institutionalism, and academic thought developed before the rise of neo-liberalism. Promoted ideas coming from the past are that we live in an interdependent trading world in which maximal gains are pursued. Maximal gains, prosperity and wealth could be achieved if trade is not disrupted by conflicts. Consequently conflicts are seen as irrational, while cooperation and realization of mutual interests are seen as the most efficient way to
enhance commerce and therefore wealth.7 Free trade also binds contacts between people,
stimulating cultural exchange, communication and understanding of different national traditions. The WTO aims at promoting and monitoring free trade policy around the globе. It provides legal rules to global commerce; makes sure corruption, social, environmental and other abuses are overcome; supports transparency; settles disputes through negotiation; assists developing countries into liberalizing their economies. It also views commerce level of openness in a direct ratio to economic growth and development. Efficiency and better living conditions are achieved through removing the barriers and extra taxes, through promoting competition and through further division of labor. Those trends in their turn lead to cheaper goods, widened variety of
services to choose from, augment income and economic growth globally. 8
4 Burchill, Theories of International Relations, 2009, 57. 5
O’Hara, “Contradictions of Neoliberal Globalization”, 2005, 2.
6 Ibidem, 4.
7 Burchill, Theories of International Relations, 2009, 60 and 67.
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3. Critical Review of Neo-Liberal Economic Thought 3.1. On Profit and Growth:
Neo-liberal ideology promoted by the West, WTO, IMF and the WB state all the above factors as the reasons why nations should pursue such goals. This section expands specifically on the relation between neo-liberal economy and profit. It researches to what extent neo-liberalism provides a basis for economic growth and poverty reduction.
As said above ideas from Adam Smith and W. W. Rostow are used to support the neo-liberal framework. Therefore the analysis continues with the father of the liberal economy – Smith and the validity of his concepts in the post-modernity. The criticism is centered onto how today such views produce different effects. Hence comparisons to nowadays economic environment are on the focus of research.
Adam Smith concept of how economic growth could be best achieved is conveyed in his
book The Wealth of Nations.9 The main points presented there are that human beings are led by
their self-interest. This self-interest is expressed through the individuals’ natural inclination to exchange and trade, which in its turn have led to the division of labor. Division of labor has led to higher economic efficiency due its consequences, which are refined skills in certain jobs,
reduced time constraints, and improved quality because of the skills betterment.10
Another positive side that could be extracted from the self-interested human nature is that wealth for the whole society is achieved in the end. Individuals pursue to increase their income optimally and thus direct their activity towards the most profitable sectors. When every person increases their own wealth, the whole nation’s budget is augmented in the most efficient way.
Therefore the government should leave the market deregulated and led by this natural process.11
The same logic applies in the policy of international trade. Every nation should produce those good or services in which it has a comparative advantage and import those commodities that will
cost it more to produce than to buy.12 This idea is developed at length by David Ricardo.13
What is interesting here is how certain points from Smith’s concept are defended and used by neo-liberal economists today. Namely that market-led economy is natural, that self-interest and
9 Adam Smith, Wealth of Nations, Hoboken, N.J : BiblioBytes Boulder, Colo : NetLibrary, ISBN: 0-585-05001-5
electronic bk.
10
Ibidem, 3 – 9.
11 Ibidem, 185 – 198. 12 Ibidem, 185 – 198.
10 private initiatives bring most wealth for countries, and that the state should not impede this process with artificial regulation, because capital flows to the most profitable branches. Thomas Friedman continues the logic of Smith that markets are natural with the idea that globalization is also natural. Globalization is seen as part of the evolution, the next stage after the Cold War, that represents the new structure of the international system. Neo-liberalism as part of globalization is
also natural and is seen as progressive.14
The following paragraphs focus on general criticism of Smith’s ideas and an examination of today’s realities. Smith’s ideas do not correspond to the new economic context. Therefore those
paragraphs also criticize the WTO which uses his vocabulary to support neo-liberal thought.15
Critiques have been addressed to the advantages of the division of labor, pointing that skills’ improvement in specific task contributes to mechanization of human abilities and thus decreases
creativity and independence of thought.16 However, today this is seen as part of progress and as
bringing efficiency and wealth. As here it is analyzed whether neo-liberalism brings prosperity this criticism is not on the main focus.
More important challenges brought to Smith’s work ensue from the different context in which we live today. Smith’s ideas concerning the comparative advantage have met difficulty for its application nowadays, even though this concept is still encouraged by the WTO. However, the
comparative advantage in the 21st century does not derive just from countries’ natural
endowments, but also from the ability to construct it. Certain businesses and services bring more profit than others. Due to the technological progress and more capabilities richer countries are able to construct their comparative advantage in the most lucrative areas. Therefore the
comparative advantage does not depend only on natural endowments, climate or geography. Dan Krier argues that “The comparative advantages of nations in the new economy shifted away from product specialization … to … task specialization that depended more upon social attributes of
regions rather than physical endowments.”17
14 Thomas L. Friedman, The Lexus and the Olive Tree, New York, NY: Farrar, Stratus, Giroux, 1999. 15
Check the WTO on the mechanisms through which “free trade cuts the costs of living, provides more choice of products and qualities, raises incomes, makes life more efficient” at:
http://wto.org/english/thewto_e/whatis_e/10ben_e/10b00_e.htm )
16
Ian Simpson Ross, On the Wealth of Nations: Contemporary Responses to Adam Smith, Bristol: Thoemmes Press, 1998, 109.
17 Dan Krier, “Finance Capital, Neo-Liberalism and Critical Institutionalism”, Critical Sociology, May 2009, Vol.
11 Moreover, when Smith’s theory was devised capital investment was limited within national borders. Therefore today’s rise of multinational corporations (MNCs), global capital flow and
off-shoring bring challenge to Smith’s concept, which is focused on the rise of national wealth.18
Those agents on the global scene accrue profit that may not necessary result in society’s benefit or rise of the national wealth. The removal of trade barriers encourage competition, which led to
merging of small businesses by MNCs.19 Hence financial profits become more concentrated in
fewer owners thus marginalizing inequality.20 Besides, MNCs’ capacities have increased to an
extent that they might be able to steer markets.21 Consequently, self- profit may not necessary
lead to profit for all.22 Furthermore, by trying to attract more foreign direct investment (FDI)
states comply with MNCs interests thus becoming dependent on them.23
Smith’s idea of the self-interested nature of markets and individuals used extensively today also shows biases. Polanyi has been the first one to express doubt in the self-interested character
of individuals.24 Yet, whether we are self-interested or socially-interested depends on subjective
interpretation and couldn’t be ultimately proven. What is important here is that this concept has been used out of proportion by neo-liberals and has led to neglect of the social. The market’s
system today functions at the cost of households and social relations.25 In the USA the service
sector has expanded, while manufacturing has declined due to the new context. Yet this market is
aligned with more social insecurity and low salaries for the employees.26
Relating back to the role of international financial organizations to watch the smooth functioning of the neo-liberal practices, social factors have been omitted there too. As those institutions are comprised of people, not robots, they might divert from the original purposes
with time, due to becoming “value-impregnated” according to Selznick.27
After the analysis of Smith and the neo-liberal implementations deriving from his concept, this chapter proceeds with W. W. Rostow and the path to prosperity. Rostow argues that every
18
Burchill, Theories of International Relations, 2009, 75 – 77.
19 Krier, “Finance Capital, Neo-Liberalism and Critical Institutionalism”, 405. 20 Ibidem, 398.
21 Burchill, Theories of International Relations, 2009, 77. 22
Krier, “Finance Capital, Neo-Liberalism and Critical Institutionalism”, 404.
23 Burchill, Theories of International Relations, 2009, 79.
24 Karl Polanyi, “Societies and Economic Systems” in The Great Transformation. The Political and Economic Origins of Our Time, Boston, Beacon Press, 1968, 43-55.
25 O’Hara, “Contradictions of Neoliberal Globalization”, 8 and 9.
12 state follows similar steps in order to achieve development and growth. He assumes that the inequality gap will be closed as soon as all countries pass those steps. Inequality is seen as an
outcome of the different speed with which countries pass those stages of progress.28 Those stages
involve gradually adopting new technologies that allow higher production, widened trade and
investment that continuously expand on the global scene.29The final stage is considered fulfilled
when mass production and mass consumption are presented.30
Today we have passed the age of mass consumption, entering into the era of financialization.
As Krier argues “raising capital and trading capital” is the most profitable sector nowadays.31
International economic institutions still promote Rostow’s path to development to every nation, which is supposed to close the inequality gap eventually. Yet this path does not expand on the new realities. Thus the criticism below is more focused on the contemporary thought backed by old concepts. The new realities are analyzed in the following lines.
Neo-institutionalism finds positive features in this financialization, researching it through the
theory of transaction costs. Costs and the private property legal structure shape behavior.32
An emphasis is also put on the in time information for the smooth functioning of the economic process: There’s no lag of information in decentralized economy and the market functions
efficiently, due to the decrease in the uncertainty. International organizations coordinate the level
of insecurity and variability.33 Thus neo-liberalism is viewed as the most efficient way of
organizing the economy due to the context in which we live today.34Growth and prosperity are
seen in respect to incentives for private enterprises, which lead to higher degree of investment,
innovations and then wealth.35
However, finance has flourished at the expense of industrial production. The empirics show
that industrial production growth has slowed down today.36 “Globalization today has largely
28 W. W. Rostow, The Stages of Economic Growth: a Non-Communist Manisfesto, Cambridge: University Press,
1960.
29 Ibidem, 4-73. 30
Ibidem, 73-93.
31 Krier, “Finance Capital, Neo-Liberalism and Critical Institutionalism”, 397. 32 Ibidem, 407.
33
Ibidem, 408.
34 Ibidem, 409. 35 Ibidem.
13 been driven by multilateral and national policy reforms, rather than technological change, as it
was in the last period of intense globalization.”37
Furthermore, this is an era where speculation and excessive investment might easily cause crises, uncertainty and deplete capital if the legal framework does not provide satisfactory
control.38 Therefore the stages of growth might first involve strengthening state capacities so that
the positives cited by neo-institutional theorists to be achieved.
A point of critique to the path of development is that it is one-sided. Neo-liberal economists today, as in Rostow’s analysis, prescribe the same path to prosperity to developed and
underdeveloped countries. Thus the WTO has mapped out the economic policy followed by the
South by providing debts for structural adjustment programs (SAPs).39
Yet, there are national circumstances that may impede the success of such policy. The stages for the West might be different from the stages in the East and the South. This can explain why since the 1980s commerce liberalization has brought mixed results. In Uganda there’s been rise of growth and decline of poverty, while Nigeria hasn’t succeeded into achieving such outcomes from SAPs. The WTO states that many states in the Middle East and Africa have failed to
achieve growth because they hadn’t applied neo-liberal policy properly.40
Economists accept that fighting unemployment or not achieving growth depends on the country’s ability to adjust to the
new context.41 Factors such as education, corruption, etc. may influence SAP, inequality, and
poverty.42 After realizing those facts, the WTO implemented more country based programs in the
South in the beginning of 2000.43 Bangladesh received food aid, and education support, leading
to 13% raise of primary-school attendance.44 Other programs aimed at providing housing to poor
segments of society and encouraging a better functioning of real estate markets, through financial
support to individuals.45 “A shift towards more market-oriented strategies sought to draw
37
Richard Kohl, Globalization, Poverty and Inequality, Development Centre of OECD, 2003, 7.
38 Krier, “Finance Capital, Neo-Liberalism and Critical Institutionalism”, 398.
39 Burchill, Theories of International Relations, 2009, 78; Also in Alain Noël, “The New Global Politics of
Poverty”, Global Social Policy, 2006, Vol. 6, No. 3, 304 – 333, see 311, 312.
40
O’Hara,“Contradictions of Neoliberal Globalization”, 2005, 6.
41 http://www.wto.org/english/thewto_e/whatis_e/10ben_e/10b00_e.htm, reached on 14.05.12. 42 Kohl, Globalization, Poverty and Inequality, 110.
43
Alain Noël, “The New Global Politics of Poverty”, Global Social Policy, 2006, Vol. 6, No. 3, 304 – 333, see 313.
44 Ibidem, 317.
45 Diana Mitlin, “Shelter Finance in the Age of Neo-liberalism”, Urban Studies, 2011, Vol. 48, No. 6, 1217 – 1233,
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individual homeowners into making their own housing investments.”46
Even though those
programs haven’t reached the lowest-income units, they have provided some segments of society in the developing and the underdeveloped world with homes. Example quoted is Chile, where
20% of the population has improved their living conditions.47 However, in most African and
Latin American countries the effects have been perfunctory. Households in the informal sector have not benefited from this policy due to the unaffordable costs of the house-loans, not enough subsidies, struggles with savings-accumulation, lack of holdings and possessions’ security
leading to investment impediments.48
In the same vein, the way neo-liberalism should be applied may imply different variants, different speed, and combination of other measures in order to comply with the country’s context. WTO experts agree to this idea stating that “the rules written into the agreements allow barriers to be lowered gradually so that domestic producers can adjust. They have special
provisions that take into account the situations that developing countries face”. 49
The presented citation shows that such factors are realized by financiers but how they are put into practice has raised doubt.
Likewise, it is interesting to research how this policy is put into practice to achieve success and to see whether the inequality gap is really getting smaller, as Rostow’s prediction. On the one hand the more intense division of labor, the unrestrained capital and innovation increases
economic profit globally.50 Statistical data shows simultaneous rise of free trade, FDI and annual
average GDP; inflation has decreased; internet and cell-phones have been introduced around the
world, serving as illustrations of global development.51 Empirical information from the World
Bank therefore shows that poverty and inequality have decreased with the rise of global
capitalism.52
On the other hand this data represent the overall growth but not the individual-level, like the households in the Third World for example. When calculations point to real GDP per capita
growth, the data shows a decrease in economic growth.53
46 Ibidem, 1221. 47 Ibidem, 1222. 48 Ibidem, 1221 - 1223. 49 Ibidem. 50
O’Hara, “Contradictions of Neoliberal Globalization”, 5.
51 Ibidem, 6.
15 Moreover, as elaborated in Smith’s review, MNCs power has grown by sweeping small enterprises thus expanding the gap. The outcome is asymmetrical development: through creation of new businesses and destruction of others. The empirical data above does not show the failed
enterprises.54 It is said that those who fail in the competitive process have the opportunity to
re-adjust to the new environment and then they can also prosper, but the success also depend on the
county’s capabilities to support this adaptation.55
If those capacities are missing, the short-run of
re-adjustment may be long enough to disrupt humans’ lives.56Neo-liberals’ defence to this
critique is that if trade barriers are applied in the long-run the situation will be way worse. Their argumentation is more focused on comparing neo-liberal policy positive effects versus
protectionist policy. As time has shown the disadvantages of protectionism it is easy to agree with the neo-liberal model. However, there is no comparison made to other alternatives, as import-substituting policy is not the only “opponent” to neo-liberalism. Such alternatives are discussed in chapter 2.
Coming back to the inequality outcomes in the underdeveloped world, the risen growth due to structural adjustment economic policy should be distributed proportionately to improve the living conditions of the households. However, due to corruptive practices, those units may not be reached. Thus redistribution of resources and profits has actually led to higher marginalization. In a nutshell, there is strong evidence to suggest that neo-liberalism has magnified the former
trends (marginalization, poverty, institutional functionality, and corruption in those countries).57
“Capital account liberalization imposed on countries despite inadequate governance results in
capital flight and currency crises.”58
Therefore growth doesn’t necessary imply less inequality.59
The institutional setting is of great importance of whether trade and growth will lead to
benefits.60 The case of Iraq after the invasion proves that point. This is a state where more than
half of the population does not participate in the formal market of labor. Since the introducing of neo-liberalism, this unstable country has become even more fragmented, because the model is not working properly. Due to the high corruption processes, the further fragmentation of the state
54
Ibidem, 13.
55 http://www.wto.org/english/thewto_e/whatis_e/10mis_e/10m00_e.htm 56 O’Hara, “Contradictions of Neoliberal Globalization”, 13.
57
Kohl, Globalization, Poverty and Inequality, 8.
16 has led to higher corruption, which in its turn has resulted into even higher redistribution of
wealth and marginalization increase.61
Economically developed states, on the other hand, have the capacities to make a better use of neo-liberalism. “Under current conditions the benefits of trade liberalization overwhelmingly flow to the rich countries, intensifying global income inequality. Some 14 per cent of the world’s population in the rich countries account for 75 per cent of global GDP. For every US dollar generated through trade, low-income countries only receive 3 cents, a degree of trade exclusion
increasingly acknowledged as a major challenge of this century.”62
3.2. On Profit and Peace:
While promoting neo-liberal economy, the WTO also states peace enhancement as an outcome of such policy. Peace is achieved because free trade stimulates cooperation, deals with conflicts through negotiation, raises the benefits of peace as capital flows to stable and therefore
peaceful areas. As Hirshman says “making money is a calm passion”.63Moreover, the legal
framework provides equal opportunities, thus small countries are given a voice. Information clarity about trading conditions is also raised. Particularistic interests that flourish in
protectionism are blocked in open trade, which allows governments to play their role more effectively.64
This section explores to what extent the neo-liberal economic model leads to the stated effects. Classical literature and research based on such concepts is analyzed and compared to the contemporary context. The reason is that behind the neo-liberal ideology stay classical texts on the relation between commerce and peace.
The concept that free trade brings wealth and peace is mirrored in Ralph Norman Angell’s view and supported also by John Mueller and Richard Rosencrance. It is a false illusion, Angell argues, to think that economic profit, resources distribution and security of one actor are bought at the expense of another as in a zero-sum-game. Mueller complements Angel’s research by
61 Michael Pugh, Neil Cooper and Martin Turner, Whose Peace? Critical Perspectives on the Political Economy of Peacebuilding, Basingstoke: Palgrave MacMillan, 2011, see 49-69.
62 Ibidem, 73.
17 pointing out that until nineteenth century economic growth across countries was missing and
may by this is why nations hadn’t realized their fallacy earlier.65
This fallacy leads to policy of self-preservation and strife for conquest. Nationalism prevents
people from seeing their delusion.66 Capitalists on the other hand are not led by nationalist
motives, but by profit and therefore see the advantages of free trade and mutual security.67 They
have realized that conquest only leads to conflicts and higher instability in the system.68 It results
in higher degree of inflation, higher taxes and disrupted markets, which exacerbate the nation’s
well-being.69 Moreover, profit and property are not really transferred from the vanquished to the
winner. The property continues to be in the hands of its former owners. The only change is in the
political power, but economic profit is not transferred.70 “If credit and commercial contract are
tampered with an attempt at confiscation, the credit-dependent wealth is undermined, and its collapse involves that of the conqueror … international finance has become so interwoven with
trade and industry that the intangibility of an enemy’s property extends to his trade”71 Indeed the
defeated nation pay taxes to the conqueror, but they also receive social benefits in return.72
Therefore war is of no avail.
Rosencrance poses similar remarks to Angell, namely that war is more costly compared to the
profits accrued through free economic relations.73 Thus cooperation is seen as the answer to both
peace and prosperity.74 Mutual binding commercial rules, giving equal opportunities foster
cooperation.75 Successful trade does not depend on expansionistic policy but on interdependence
and free flow of capital.76 Wealth is realized through constant exchange, because production
profit goes together with consumption: as Angell says “produce is only wealth if you can get rid of it”77
Hence exchange should not be impeded by trade barriers. There should be only mutual
65 John Mueller, “Capitalism, Peace, and the Historical Movement of Ideas”, International Interactions, 2010, vol.
36, 169–184, see 173.
66 Ralph Norman Angell, the Great Illusion, Now, Harmondswoth: Penguin, 1938, 214 and 215. 67 Ibidem, 215, 216, and 220. 68 Ibidem, all. 69 Ibidem, 53-55, and 136. 70 Ibidem, 76, 135, and 145. 71 Ibidem, 116. 72 Ibidem, 146 and 147.
73 Richard Rosencrance, The rise of the Trading State, NY: Basic Books, 1986, 155 – 162. 74
Angell, the Great Illusion, Now, 48.
75 Ibidem, 103, 182, 204. 76Ibidem, 115.
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rules that facilitate and protect this natural flow.78While coercion hinders this process,
cooperation facilitates it and thus augments gains through a win-win model.79
In addition, through transnational trade a mutual learning process about various and effective
ways to produce goods is involved.80 Technological innovations, by increasing productivity, will
help into overcoming the problem with the scarcity of some resources. 81 Angell believes that
people will realize the path to progress and development as a process of social learning.82
The concept that trade and war are incongruous with each other has been criticized with the contention that some conflicts have arisen from countries’ pursuit of commercial wealth in order
to increase their military power and dominance.83 This statement however does not confute
Angell’s logic as the author acknowledges such possibilities, describing them as the great illusion. If this quest for dominance is overcome in favor of the more advantageous free trade, then war and commerce indeed become incongruous.
The concept that international trade curbs the conquest motivation and thus has appeasing
effects on states has also been attacked.84 Yet there are no wars between countries with
developed markets.85 The two world wars can be explained through the idea that states were led
by the logic of conquest.86 However, the view that open trade is more beneficial than takeover
prevails in more and more states.87
Thomas Friedman confirms that by saying that “no two countries that both had McDonald’s had fought a war against each other since each got its McDonald’s … McDonald’s countries
don’t like to fight wars anymore, they prefer to wait in line for burgers.”88
By McDonald network the author embodies a relatively developed middle class. Example presented is the Middle East today: the conflicts are between countries like Israel and Syria/Iraq/Iran (the last
78Ibidem, 155. 79 Ibidem, 163-169. 80Ibidem, 83, 171. 81Ibidem, 205, 206.
82 Angell, the Great Illusion, Now, 83, 253. 83
Burchill, Theories of International Relations, 2009, p64.
84 Susan M. McMillan, “Interdependence and Conflict”, Mershon International Studies Review, vol. 41 (1), 1997, 33
– 58, see 36.
85
Mueller, “Capitalism, Peace, and the Historical Movement of Ideas”, 179.
86 Ibidem, 178. 87 Ibidem, 179.
19 three lacking McDonald’s chain) but not between Israel and Saudi Arabia/
Lebanon/Egypt/Jordan, all of which have their McDonalds.89
Countries like Iran, Iraq, and Afghanistan are becoming less and less according to
Friedman.90However, the author does not elaborate in detail why those countries do not share
similar attitude towards market liberalization profits. A contra-example is Pakistan, which has
middle class strong enough to afford McDonalds’, but has been aggressive towards India.91
Therefore the role of ideologies and culture should also be taken into consideration. The critical assessment of the peace – open trade relationship expressed by authors like Angell and Rosencrance seem well-supported. Western international economic institutions use this relation to prove that neo-liberalism leads to peace. However, they miss that there are many variants of open trade models to which the above work can also be related. More importantly, ideological and cultural impediments may undermine the peace enhancement because of the universal character of neo-liberalism. This consideration is also omitted in Friedman’s theorizing. Anti-American feelings are sometimes caused because the “globalization has an
American face”: its market-model and ideology are everywhere.92
In addition, the US dominance in economic concepts and policy throughout the world may lead to asymmetry and
conflicts.93(This comment can also be viewed as a backwash effect to Rostow’s and WTO’s
one-way prosperity path. Yet, whether asymmetry in wealth and power may lead to conflicts will be discussed in chapter three.)
Michael Mousseau puts another emphasis. Namely that economic norms followed in a fully developed free trade bring peace. Those norms transform into social views and behavior, which
is related to peaceful arrangement of conflicts and interests. 94The theoretical framework is in
conformity with the concept of cultural materialism.95 According to this concept economic
principles affect and shape culture and identity over time. Thus countries with similar economies and level of development yield similar social norms no matter of their geographical proximity or
89 Ibidem, 195. 90
Ibidem, 201.
91 Pugh, Whose Peace? Critical Perspectives on the Political Economy of Peacebuilding, 25, 26. 92 Friedman, The Lexus and the Olive Tree, 309, 310.
93
O’Hara, “Contradictions of Neoliberal Globalization”, 2005, 14.
94 Michael Mousseau, “Market Prosperity, Democratic Consolidation, and Democratic Peace”, Journal of Conflict Resolution, 2000, vol. 44 (4), 472 – 507.
20
level of communication in between each other.96 In other researches he also uses theory of global
politics, anthropology and sociology to explain how market principles transform into democratic
social and political values with time.97
Economically developed countries, follow the market laws of contracts. Contracts on their part involve: mutual obligations; mutual gains; individuals follow their own interests through cooperation, negotiation, compromise and expression of free will when signing the deal or buying the product; resorting to the court and the rule of law if conflict concerning the contract arises; All individuals are equally liable to the rule of the contract and law clauses; Trust in the
force of the contract leads to engaging with various groups of society.98 Those norms gradually
become institutionalized democratic principles and lead to the emergence of democracies.99 They
transform people into tolerant, cooperative, non-coercive society.100
Subsistence communities and not completely developed economies involve different economic principles. Their relations are not based on the force of the contract. People produce goods for themselves, not for the market or for profit. If there are some rules and organization, it is set by “a common group utility”. This way people are stripped of their right to negotiate a deal,
to express their own will, and are subject to exploitation.101
A point of critique concerns the way mutual trust is shaped through the economic norms of market developed states. If economic competition also translates into social norms and behavior, then it might lead to decrease in reciprocal reliance and increase in individualism. Some
academics underline that mutual trust has been decreasing with the rise of neo-liberalism, where self-interests are pursued at the expense of social relations:
“Individualism has also led to an expansion of consumerist practices as people try to
accommodate the emotional vacuum through higher debt and enjoyment of goods and services bought on the market. There is an associated lack of community, including political and civil society, as people spend less time in truly recreational, friendly, and social-political practices and
96
Ibidem, 476.
97 Michael Mousseau, “The Nexus of Market Society, Liberal Preferences, and Democratic Peace: Interdisciplinary
Theory and Evidence”, International Studies Quarterly, 2003, vol. 47 (4), 483 – 510.
98
Mousseau, “Market Prosperity, Democratic Consolidation, and Democratic Peace”, 476 – 481.
21 more time in “economic” activities of wage-labor, financial analysis, and human capital
development.”102
The research continues with the work of Patrick McDonald who finds other factors that link capitalism to peace. He is concerned with the ratio between public and private property and how that affects peace. His empirical research confirms that capitalist economy, due to the higher
extent of private ownership, leads to decrease in the international military conflicts.103 The link
between the role of public/private property and conflicts is explained through the theory of bargaining.104
Large proportions of state’s services and land in the public sector result in increased power of the government over its nation. This also implies less domestic opposition, concerning foreign affairs’ decisions or more resources allocation for military purposes, which may provoke arms
race due to the shift of military power.105 Moreover a country enhancing this kind of power may
be targeted by other states due to creating a threat perception.106 This argument is well-supported
with statistical data and examples from history.107 One of the illustrations used is the case of
Egypt government in 1956 when it decides to nationalize the Suez Canal and the profits from it,
which invokes a preventive attack by Britain and allies.108
Large proportions of private services and land result in increased power of the capitalist class. Government’s decisions might meet opposition from the private sector and therefore they must negotiate the allocation of resources with its society. Thus foreign policy decisions depend on
negotiations with the capitalists, because they own some of the needed resources.109 Capitalists
on the other hand are not interested in increasing the military potentials but in stable domestic
and international environment in order for their business to succeed. 110
A point of critique is that economically developed countries with enhanced proportion of private property also might become attractive targets. If private property and open trade lead to economic progress and wealth, then developed states can provide cheaper defence and more
102 O’Hara, “Contradictions of Neoliberal Globalization”, 14.
103 Patrick J. McDonald, “Capitalism, Commitment, and Peace, International Interactions: Empirical and Theoretical
Research in International Relations”, International Interactions, 2010, Vol. 36, No. 2, 146 – 168.
22 sophisticated military devices due to their wealth and therefore create threat perception in the others.111
In addition, McDonald researches how group interests in open and closed economies affect system stability. He argues that groups of society that benefit from protectionism are likely to support governmental policy even if it’s war-prone, because they depend on the state in order to
accumulate wealth.112 Decrease in the imports and international trade, increases the profits for
the protected sectors as their services and goods do not meet foreign competition within the state. Moreover, conquest may expand the domestic economy and bring additional wealth to those
groups.113 Erich Weede’s research also expresses similar concerns against protectionism.114
Capitalists on the other hand do not share such interests. They do not depend on the
government for protection but follow the principles of competition. Private actors do not count
on aggressive policy in order to reach new markets.115 The low-income sectors of society are also
likely to support peaceful policy as they are the ones usually caring the burden of war.116
Consequently free trade is associated with groups of society that have interest in peaceful status
quo, while particularistic interests in protectionist policy tend to support war.117 John Mueller
agrees stating that peace is associated with capitalism, while war leads to protectionist policy and
decrease of international trade.118Statistical evidence in the period after the Second World War
supports this argument.119
On the other hand businessmen activities sometimes profit from conflicts. Examples here are private military companies like CACI, Black-water and TITAN. Those corporations have
accrued millions of dollars from the instability in Iraq.120 Sometimes private actors profit from
illegal businesses, other times from increased inflation or low wages for their employees.121 In
111
Gerald Schneider and Nils Petter Gelditsch, “The Capitalist Peace: The Origins and Prospects of a Liberal Idea”, International Interactions, 2010, Vol. 36, 107 – 114, see 111.
112 Patrick J. McDonald, “Peace through Trade or Free Trade”, Journal of Conflict Resolution, 2004, vol. 48 (4), 547
– 572.
113
Ibidem, 553.
114 Erich Weede, “Economic Policy and International Security: Rent-Seeking, Free Trade and Democratic Peace”, European Journal of International Relations, 1995, vol. 1 (4), 519 –537, see 527, 528.
115 McDonald, “Peace through Trade or Free Trade”, 553. 116
Ibidem, 552.
117 Ibidem, 548.
118 Mueller, “Capitalism, Peace, and the Historical Movement of Ideas”, 180, 181. 119
McDonald, “Peace through Trade or Free Trade”, 556-558.
120 Robert Greenwald, Iraq for Sale: The War Profiteers, documentary film, produced and directed by Robert
Greenwald and Brave New Films, Culver City, CA, 2006.
23 addition, they might support radical parties from the right in order to limit the power of labor
unions and to keep workers’ salaries down.122
Continuing with the capitalist peace proponents, Erich Weede’s ideas are followed in the next paragraph. According to Weede free trade and capitalism bring economic growth and
development.123 Capitalism and growth lead to the establishment of democracies.124 Democracies
in their turn are peaceful towards other democracies due to institutional and legal constraints.125
Therefore free trade leads to the establishment of wider peace-prone area.126
The argument that free trade promotes prosperity lies on Smith’s ideas and Ricardo’s concept
of comparative advantage discussed and criticized above.127 It also lies on the concept of
absolute gains and profits from export and interdependence.128 Yet, whether we are oriented by
absolute or relative gains is a never-ending debate and it is not subject of analysis here.
Interesting to add, in concern to empirical evidence cited by both liberal and contra-liberal
proponents is that it is influenced by the chosen independent variables.129 According to
McMillan the results of the empirical research might not be completely objective due to omitting certain variables that also might reduce conflict. For instance, such variables might be of political
origin, strategic ones, geographical, or state-society links.130 This might explain why Bremer
provides statistical evidence that joint development is negatively linked to conflicts.131
While Mansfield and Barbieri find contra-evidence for the peaceful effects from trade.132
Lastly, this chapter introduces Edward D. Mansfield and Jon C. Pevehouse’s work in relation to preferential trade agreements (PTAs). PTAs between countries are seen as stimulating liberal
commerce, as being economically profitable and peace-prone.133 Partners in PTAs refrain from
involving into conflicts because such obstacles impede PTAs from functioning properly and
122 Ibidem.
123 Weede, “Economic Policy and International Security”, 521. 124 Ibidem, 522. 125 Ibidem, 528. 126 Ibidem, 520. 127 Ibidem. 128 Ibidem, 520, 524.
129 McMillan, “Interdependence and Conflict”, 43. 130 Ibidem, 45.
131
Bremer cited at Schneider and Gelditsch, “The Capitalist Peace”, 109.
24
from bringing profit.134 In order to facilitate a smooth process they launch negotiation bodies and
conferences.135 They reduce commerce barriers and increase contacts and cooperation between
each other. 136 According to the WTO, PTAs result in “gaining credibility”.137 The European
Community after the Second World War is used as an example of peaceful trade relations.138
The enumerated pluses from PTAs are: members sign the agreements due to expected benefits such as rise in investment, access to significant resources, stronger negotiating voice as
far as third parties are concerned139; If there’s high asymmetry in between the members, the most
powerful ones can constrain the weaker members from military conflict.140 The positive effects
from PTAs explain their evolution today. They are used more and more often by states due to
economic and political motives.141
Robert Gilpin argues that interdependence in general brings insecurity about provision with
resources, depending on others, which may lead to conflict.142 However through PTAs there’s
knowledge and assurances about the profits apportioning.143 Yet problems arise if there’s high
asymmetry between the PTA members. Most of the profit goes to the powerful states, which may
cause dissatisfaction, disputes and refraining from the PTA.144 Another weakness is that
developing or underdeveloped states may experience hardships such as being “outstripped by the
cost of integration” and collect gains too slowly.145
On the other hand, it deserves mentioning that there might be PTAs between countries not necessarily following neo-liberal model. Even
the WTO admits that PTAs have been observed even before globalization took off.146 Therefore
the pluses from PTAs shouldn’t be directly attributed to the neo-liberal model when defended against other models, as many alternatives also involve PTAs in their framework.
134 Ibidem, 776, 779. 135 Ibidem, 776, 781. 136 Ibidem, 779, 780. 137
World Trade Organization, The WTO and Preferential Trade Agreements: From Co-existence to Coherence, World Trade Report 2011, 94.
138 Mansfield and Pevehouse, “Trade blocs, Trade flows, and International Conflict”, 793. 139 Ibidem, 779.
140
Ibidem, 799.
141 World Trade Organization, WTO and Preferential Trade Agreements”, 85, 94-105. 142 Robert Gilpin cited at McMillan, “Interdependence and Conflict”, 41.
143
Mansfield and Pevehouse, “Trade blocs, Trade flows, and International Conflict”, 781.
144 Ibidem, 799. 145 Ibidem, 800.
25
4. Conclusion:
This chapter explored the main features of neo-liberal thought. The first part researched the link between profit, development and the new market system. The second part focused on how open trade and neo-liberal economic order relate to peace.
Prominent ideas from Adam Smith, Rostow, and Norman Angell were presented and compared to nowadays’ practices. Western economic argumentation often stands behind those authors. Yet there are new realities which such theories couldn’t have foreseen. Those authors research open trade, not necessary neo-liberal open trade.
The statistical support for both liberals and contra-liberals showed mixed results, especially when poverty was taken as a dependent variable. Implementation of SAP in Uganda
demonstrated economic growth and decline of poverty since the 1980s. Nigeria, however, did not experience much success from SAP. Chile’s case showed that 20% of this country’s population improved their socio-economic status after the encouragement of market – oriented strategies. Yet, SAP in many countries in Africa, the Middle East and Latin America result either in perfunctory success or even in exacerbation of the previous conditions. Iraq is a case in point. It has experienced further defragmentation of the political and economic structure, and increase in the domestic income and social inequality. The WB empirical data, however, presents defence for the neo-liberal strategies, showing that global GDP has risen, while global poverty and inflation has decreased.
Yet global GDP measurement is macro-level evidence. Macro-level statistics do not show what happens to the households, how their lives and socio-economic conditions are influenced. The South has an enormous informal sector, in which the lowest-income units are occupied and which is not presented in statistics on profits’ measurement. Moreover, macro-data shows overall wealth increase, but how this wealth is redistributed between units is what proves whether
inequality has decreased. As it was seen in this chapter, the neo-liberal framework provides opportunities for more concentrated profits within the strongest actors, thus actually expanding the inequality gap.
26
palette of factors playing a role.147 McMillan’s remark is right on the spot, when she claims that
there’s a multitude of complex links and effects in the net of mutual interdependence. Tracing
the origin of those effects is difficult because it is not a linear equation.148
Yet Chapter 1 showed that the negatives and positives go hand in hand. Decreased inflation is achieved at the expense of increased unemployment. The same logic applies to the concept of interdependence. It may lead to mutual economic profits, but may involve asymmetrical problems. There might be overall global growth of trade and financial activities, but at the expense of social services and GDP per capita. It was also said that macroeconomic statistics do not reveal the whole reality. Therefore the second chapter is focused on what happens at the micro-level. It analyses specific countries’ cases and households’ relations within nations. It also shows how the neo-liberal model works in practice and how the inequality gap is influenced by the questioned policy.
Another major finding in Chapter 1 was that neo-liberal economic policy succeeds in its claims to the extent that national policy is strong enough to handle the change. Strong
institutional framework is of great importance for inequality to be reduced. As some countries often lack these criteria neo-liberal economy does not produce the desired goal.
Yet, if protectionism or communism replaces the economic trends today, the situation will be way exacerbated both for the North and for the South. Thus capitalism, even with its negative sides, seems the best way for society to be organized when compared to the above mentioned alternatives. But are those the only alternatives? Is neo-liberalism the best way for an economy to be organized? How to balance the quest for profit, money and civilization with the trend to retain
one’s value system and culture remains the conundrum of globalization.149
Therefore the following chapter expands on proposals for alternatives, motivated by the backlash effects of neo-liberalism. Thus it tries to answer the above questions, by exploring in detail the short-comings of the new economic practices.
147 McMillan, “Interdependence and Conflict”, 52-55. 148 Ibidem, 35, 40.
27
III. Chapter 2: “The Backlash Effects of Neo-liberal Economic Policy” 1. Introduction: Structure of the Chapter
The neo-liberal economic system governing today’s world has been criticized by some political economists, radical parties from the left and right, feminists, anti-globalization movements and labor unions. Protests have come from countries breeding religious fundamentalism, South Africa, Mexico and even France. Demands for reforms have been
presented since the 1990s.150 The reasons come from the produced backlash effects of the
analyzed policy. Some of those effects were uncovered in the first chapter, while compared to the positives. The first chapter, however, was focused on the theoretical model of neo-liberalism and its ideology. The level of analysis was also global, providing much macro-empirical data. This chapter continues with exploring the implementation of the model and the negative outcomes of the latter, providing micro-level evidence. It expands on the rise of the inequality gap between the North and the South and the increased marginalization of society within countries. Attention is also paid to the change of the structure of power globally in regard to the financial sector.
Another section of this chapter is devoted to cultural implications deriving from the new economic scheme. Thus the Western dominance of economic norms and their imposition on various cultures that do not share such positive attitude towards them is seen as another shortcoming.
The last section of this chapter analyzes what critical political economy offers as alternatives to the neo-liberal orthodoxy. The proposed reforms also address the neo-liberal policy
shortcomings and are aimed at correcting them. The goal of this section is also to find out whether such substitutes are possible and whether they can bring better outcomes and prosperity for all. Moreover, through such contrast a wider and more thorough picture of the neo-liberal policy will be achieved. Yet, the main purpose of this chapter is to research to what extent neo-liberal economic policy has contributed to the rise of global inequality.
150
28
2. Analysis:
2.1. The Backlash Effects of the Neo-liberal Economic World Order: How the Inequality Gap between and within Countries is Expanding
When researching inequality some factors apart from the neo-liberal economic policy should be given awareness as they also might have influenced the above phenomenon. An instance here is the debt rise of the South countries as a consequence of the 1970s crisis of the welfare system. Second, the technological advance of the First world ever after the industrial revolution has given it a head start, thus making it easier to contribute from different economic models more than the underdeveloped world. Third, the developed economies have stronger political power and therefore better bargaining tools, which they can exert on the rest. Fourth, the spread of multi-national corporations in the South have provided work vacancies, thus contributing to transfer of jobs from the informal to the formal sector. Fifth, statistical data on poverty reduction
has shown diverse results, thus complicating the picture. 151 Sixth, weak state capacities and
corruption in the Third world might have prevented the process of closing the abysmal gap. Therefore it seems that neo-liberalism is not the main culprit to blame for the lack of success. However, there are backlash effects coming right from this new orthodoxy, and they are explored below.
Neo-liberalism is seen as more crisis prone, (as shown further in this chapter). Yet the USA and the developed countries have better mechanisms to deal with such phenomena: Namely, the Federal Reserve and The Federal Deposit Insurance Corporation (FIDC) abilities to bail out US firms. Poor states, in contrast, do not have those mechanisms and suffer freezing of loans, debt
increases and dependence on the IMF and the WB.152
Another flaw of the model in question is its negligence of South states’ realities. For instance, governmental cuts on social services lead to decline of the health care and education level, and to
exacerbated within-group inequality.153 The rich can recover better from public expenditures’
cuts through “their enhanced post tax income”, while the rest are not backed with such income
151 Yvonme M. Tsikata, “The Political Economy of Globalization, Poverty and Inequality in Sub-Saharan Africa”, in
Richard Kohl, Globalization, Poverty and Inequality, Development Centre of OECD, 2003, 55.
152 Sahle, World Orders, Development and Transformation, Basingstoke: Palgrave Macmillan, 2010, 209, 210. 153 Ibidem,151, 152. Also in: Jan Nederveen Pieterse, “Global Inequality: Bringing Politics Back In”, Third World
29
and suffer the consequences.154 On the other hand, given the fact that AIDS and cholera are a
chronic problem that decimates the labor force in Africa, public expenditures’ cuts have a
devastating impact.155
Likewise, governmental cuts on social services spread to the education sector, leading to brain
drain.156 Primary school attendance dropped.157 The comparative advantage of cheap labor adds
to the disincentive for education, because most jobs are in the unskilled labor sector.158
In addition, negative impacts in the South come with the encouragement of tradable goods for export (as recommended by neo-liberal economists). Such are the cash crops, which are expected to enhance the GDP in those regions. However the risen cash crops’ exports deepened the Third
World food dependence on the First world.159 Exports of raw products such as cocoa, rice,
copper, etc. meet a declining price from the cheaper western products due to technological
advances and better efficiency.160 The North/West gained forty times as much as the South for its
exports.161 Thus Africa have become more vulnerable. “Africa is stuck in a rut of
low-value-added exports, notably agricultural commodities and minerals, which leave it exposed to international price fluctuations, attracting few technology inflows, and having few backward
linkages to the rest of the economy.”162
Furthermore neo-liberalism applied in the South to reduce poverty does not put in the
equation the power of local elites to reverse the gains. Thus neglect of the power structures ends
in a risen inequality within those countries.163 Proper SAP implementation depends also on the
assistance of the administrative units. However they are often corrupt and politicized, serving
154 Rapley, Globalization and Inequality: Neoliberalism’s Downward Spiral, 87, 88.Also in: Barry Riddell,
“Structural Adjustment Programmes and the City in Tropical Africa”, Urban Studies, 1997, vol. 34 (8), 1297 – 1307, see 1302.
155 Steve Kayizzi-Mugerwa, “Globalization, Growth and Income Inequality: the African Experience”, in Richard
Kohl, Globalization, Poverty and Inequality, Development Centre of OECD, 2003, 47; Also in: Walden F. Bello,
Dark Victory: the United States, Structural Adjustment and Global Poverty, London: Pluto, 1994, 55. 156
Francois Bourguignon and Thierry Verdier, “Globalization and Endogenous Educational Responses: The Main economic Transmission Channels” in Richard Kohl, Globalization, Poverty and Inequality, Development Centre of OECD, 2003, 30.
157 Tsikata, “The Political Economy of Globalization, Poverty and Inequality in Sub-Saharan Africa”, 54. 158
Bourguignon and Verdier, “Globalization and Endogenous Educational Responses”, 22, 23.
159 Sahle, World Orders, Development and Transformation, 156.
160 Phillip Anthony O’Hara, “Contradictions of Neoliberal Globalization: the Importance of Ideologies and Values in
Political Economy”, 2005, 17.
161 Sahle, World Orders, Development and Transformation, 158.
