Neo-Liberal Economic Models and the Global Financial Crisis - Case Study Example

Running Heading: Neo-liberal economic models and the global financial crisis Neo-liberal economic models and the global financial crisis Name 7th May, 2010 Neo-liberal approaches to economies Neo-liberal approach to an economy simply refers to a set of ideas that makes use of the neoclassical theories of economics. These theories seek to minimize the participation of the state and maximize the role of the market or the private sector of an economy in determining prices, supply and demand of commodities. The interesting aspect of these approaches is that the choices a consumer makes, the transactional thinking involved and the individual independence shift the risks associated with the role of state onto a particular economic entity. This can be an individual or a firm, in question. In summary these approaches seeks to transfer the manipulation of an economy from public to the private sector with the aim of being the creation of an efficient government and good economic growth. John Williamson's in the "Washington Consensus," pointed out 10 proposals considered by the International Monetary Fund (IMF) and the World Bank (WB) that would make an economy neo- liberal. The proposals are listed below. Fiscal policy Redirection of public spending from subsidies Tax reform–interest rates that are market determined and positive (but moderate) in real terms Floating exchange rates Trade liberalization Liberalization of the "capital account" Privatization of state enterprises Deregulation Legal security for property rights and Capital Financing The liberal approaches to IPE in relation to current global financial crisis An exhaustive analysis of the central role of neo-liberalism in the current economic crisis can be viewed through the causes of the crisis. George Soros argued that the notable feature of the global financial crisis is that it the crisis was generated by the system itself and not caused by some external shock. The current crisis is the result of a 30-year application of an economic policy by a free-market ideology that is known as neo-liberalism or economic liberalism. The main pillar of this ideology is that government control should be constrained or even replaced by market forces. Neo-liberalism stems from the main theoretical view of the superiority of unregulated markets, and in particular, unregulated financial markets (Postero, 2007). The crisis has resulted in costs and debts for the IPEs which will be felt for decades to come. It was estimated that the 2009 deficit in the United States will was high as 12.5%. Secondly it has touched the lives of families through plummeting unemployment, dipping wage growth and collapsing values of assets. Thirdly, the financial markets did suffer the greatest dislocation ever. Fourthly, equity markets on the global arena have lost an approximate of US$32 trillion in value since their peak, which is equal to the combined GDP of the G7 countries in the year 2008. Also the credit markets have all but dried up, with credit expansion at its lowest level since the Second World War. Lastly at the centre of the crisis, house prices did plummet in many IPEs, with US prices falling at a fast rate since modern records were introduced. The mercantilist approach to contemporary IPE This approach is still relevant to the contemporary IPE. A good premise is that Mercantilists view the International Political Economy as a zero-sum game. This basically means when a nation gains, either in wealth or power, another nation must loose. This understanding enables us to see why mercantilists are very aware of global economics crisis. A zero-sum thought emphasizes national security and sovereignty. It merely translates to the less secure and powerful a nation can be and the more powerful another nation is. Most mercantilist policies center on protectionism. The US economic prosperity is going to be vulnerable when it relies heavily upon other countries. The United States economic efficiency points to getting oil cheaply, several defensive mercantilists wish to establish fresh sources of oil or other sources of renewable energy which would make it less reliant on foreign nations, even if it means disregarding total efficiency (Hyslop-Margison & Sears, 2006). Generally, Mercantilists have a realist opinion that the world is in a constant state of anarchy courtesy of human nature. The most fundamental principle is that wealth creates power and power creates security. At the economic standpoint, if a country depends on another’s industries, it is less powerful and consequently insecure. For them, the market transactions are a zero sum game where only winners and losers are there. Marxian approach to contemporary IPE The Marxian approach is not relevant anymore to the contemporary IPE. In the Marxian approach, there is evident monopoly in the markets, exploitation of the poor by the rich, limited choices for most of the population, the inherent ideology and culture is under tight control of capitalist, the ruling class control the state, the worker is without any assets but his labor, the capitalist is the one with the market information and the assets distribution is based on class position. The IPE has tried much to move from this approach simply because it does not level the playing ground for all the players in an economy. Class system has been abolished thanks to equal access to education, which is a lee way to upward mobility, and improved health care which lengthens the individual lifespan. This approach is rigid in a broad sense. Imagine the state being run exclusively by the rich. The effect would be the uprising by the poor people who now forms the majority. Neo-Gramscians view on the global economy The Neo-Gramscians view the global economy as the coming together of ideas, institutions and material capabilities that shape every contour in the formation of a state. It borrows heavily from the work of Antonio Gramsci. Neo-Gramscians study how the particular group of forces operating in the social sphere, the state and the overbearing configuration that develop and maintain world orders. It seeks to find the interlocking relationship between the state and the structure. In the core approaches to international political economy, the importance of the centrality of the state is not questioned but Neo-Gramscians, use an approach focusing on transnational historical materialism, which seeks out the state formation and international politics as the turning points of the international operations culminating in capital accumulation and formation of classes. They reject the separation of subject and object. Another feature of the Neo-Gramscian view is that a class is termed hegemonic when its dominance via institutions and concessions has been made legitimate. If a class has establishes its domineering this way, as well as in the mainstream political structure of a state, then it makes up a historic bloc. Neo-Gramscian has indicated that courtesy of globalization, a neo-liberal international historic bloc continue to exist (Harvey, 2007). The Bretton Woods System and the reason for its break down The Bretton Woods is a monetary management agreement signed by 44 Allied nations which set the rules under which the commercial and financial transactions between the world's major industrial states during the World War II would operate on. The Bretton Woods system was a kind of a negotiated monetary order which aimed to police the monetary relations among independent nations. Rebuilding the international economic system meant the putting up a system of guidelines, procedures and institutions to regulate the international monetary system. International Monetary Fund (IMF) was established so was the International Bank for Reconstruction and Development (IBRD). IBRD is today under the World Bank Group. They became operational in 1945 after a substantial number of countries became signatories. The main feature of the System was a mandate for each country to implement a monetary policy that would maintain the exchange rate of its currency within a fixed value with a plus or minus one percent (Aligica & Evans, 2009). Bretton Woods System broke down because of the development of a high level of monetary interdependence. This began by the return to convertibility of the Western European currencies at the end of 1958 and of the Japanese Yen in 1964. This convertibility did facilitate the big expansion of international financial engagements, which led to a more deep monetary interdependence. Another notable contributor of the fall was the growth of international currency markets made possible by the emergence of international banking consortia under which multinational banks created syndicates. The banks would make big international transfers of capital not only for the purposes of investment but for speculating and hedging against the fluctuation in the exchange rates. The role of government in APEC APEC stands for Asia-Pacific Economic Cooperation. It is a group of 21 Pacific and Asian countries who have come together to cooperate on regional trade and investment, liberalization and facilitation. The roles of government involved include the trade and investment liberalization. This involves the reduction of the trade barriers in the region to facilitate fast and efficient transactions. It’s also to lower the costs of doing business. The other role of the government is on the economic and technical cooperation. This goal enables the government to establish and ratify the free trade zone agreements which should expand considerably the economic growth and the commerce in the country. In the today’s agreements in the world, they are negotiated. The other role of the government is on the business facilitation. This role aims at cutting business transaction costs between the countries and increasing transparency in the region’s trading system. Reference Aligica, P.D. & Evans, A.J., 2009. The neoliberal revolution in eastern Europe: economic ideas in the transition from communism. Cheltenham: Edward Elgar Publishing Harvey, D., 2007. A Brief History of Neoliberalism. London: Oxford University Press Hyslop-Margison, E.J. & Sears, A.M., 2006. Neo-liberalism, globalization and human capital learning: reclaiming education for democratic citizenship. New York: Springer Postero, N.G., 2007. Now we are citizens: indigenous politics in postmulticultural Bolivia. California: Stanford University Press Read More