Neo-Liberal World Order and Economy of the Developed World - Essay Example

Running Head: NEO-LIBERAL WORLD ORDER AND ECONOMY Neo-Liberal World Order and Economy of the Developed World A shift in the Business Model Claudia Heuer Student number: 2563286                             Introduction The advent of neo-liberal policies such as the reduction in tariffs, abolition of limitations on foreign investment as well as the integration of services, for instance finance and insurance in international trade systems have contributed to the growth of economic globalization experienced in the 20th and the beginning of 21st century. Globalization has led to massive economic transformations characterised by trade liberalization, reduction in government control on trade through deregulation policies as well as growth of the global market place. These changes have increased competition in the international market. Moreover, political transformations as a result of globalizations have caused the reorganization of power from national to international bodies as well as the development of global civil society. Social and cultural transformations are also evident as a result of integration of different cultures facilitated by technological advances especially in communication as well as improved transport linkages globally (Gaddis & Hurrell 2003). With increased globalization, global political economy developed as a multifaceted field focused on international trade, finance and economic policies of various nation states affecting international trade and production. Neo-liberalism fails to take in to consideration the distributive facets of economic development, environmental integrity, employment creation and social well-being (equity and justice) among other aspects ‘collective social good’, which was the concern of the welfare state. Consequently, it has encouraged denationalization, deregulation and haphazard opening of markets as a solution for many of the troubled Third World economies. Neo-Liberal World Order and Economy of the Developed World According to Yovanovich (2003), neo-liberalism can be considered as a flawed social and moral philosophy aimed at promoting accumulation of wealth among developed economies at the expense of developing nations. The neo-liberal perspective generates the notion that poor Third World countries can only accomplish their economic development goals through integrating economic policies, for instance liberalization in their systems. This would consequently uplift them from perpetual poverty and enhance the standards of living for their populace. However, Foot et al. (2003) observe that liberalization would essentially damage the Third World countries with slumps in economic growth, escalation of interest rates as well as intensification of income inequality. The difference between the average incomes of the ten richest and ten poorest countries doubled between 1980 and 1999. This rise in income inequality can be attributed to increased liberalization of trade in Third World countries. The fundamental flaw in neo-liberal policies is that they presume that market forces are self-regulatory, i.e. government intervention would be unnecessary (Stubbs & Underhill, 2006). When political institutions such as governments genuinely regulate markets, they function efficiently and equitably to promote economic growth. A certain level of government involvement is necessary to safeguard transparency in market dealings as well as to shield the poor from exceptionally unpredictable market conditions. Nevertheless, the obsessive support for market liberalization with political institutions missing comprehensive financial policies has been accredited for some of the economic catastrophes that Third World countries are faced with. These include the 1997-98 East Asian financial crisis, 1980 and 1994 Latin America debt crises and the Mexican peso crisis of 1994-95. Political will among the developed economies in G-8 has been lacking to mitigate the causes of the 1997 Asian crisis (Woods, 2001). Global financial institutions such as the World Bank and IMF have played a significant role in promoting neo-liberalism. They provide donor states with a framework that promote international expansion. The recipient countries are compelled to finance the credit extended to them by opening up to international markets through enhancing foreign direct investment and promoting export earnings as well as reduction in government expenditure on the social sector such as healthcare and education. Global neo-liberalism has promoted the institutionalization of the requirements for international expansion that is safeguarded by the creation of international institutions such as the WTO, World Bank and IMF (Woods, 2001). These institutions enhanced the success of neo-liberalism in the developed countries especially the US and UK in the 1980s and its eventual dominance in the Third World. The formation of WTO was a significant milestone towards the development of an international institution as well as the formulation and implementation of the governing mechanism of international expansion. The World Bank and IMF promote international expansion through national structural reforms. The credit seeking countries are compelled to restructure national institutions through implementing neo-liberal trade and macroeconomic policy strategies such as liberalization of the financial sector, commodity prices, imports and foreign exchange. The government’s role in social protection is undermined through liberalization (Foot et al. 2003). North Atlantic Free Trade Area (NAFTA) is an example of the institutional arrangements formed under the influence of the US to promote international expansion interests of developed countries through promising greater benefits of economic growth to developing economies. It demonstrates the connection between the predominance of neo-liberalism and globalization, which correspond to the erosion of the welfare state and the declining capability of the nation state to safeguard the significantly marginalised areas and people. Neo-liberalism is constantly being entrenched in the grass-root level by both international agencies and countries by means of economic re-structuring influenced by the international powers. It does not take coercion to institutionalise neo-liberalism. Rather, it takes the form of deliberate diplomatic ties established for mutual benefit (Hill, 2014). Global political economy is founded on the p that foreign policies implemented by one country with regards to tariffs and political or trade alliances influences the economy as well as the stability of a regime in another country (Stubbs & Underhill 2006). Political instability or financial crisis affecting the state that is the source of raw materials can have severe economic and political outcomes in a foreign country. It can also have a negative impact on social stability in the importing country. While some domestic foreign policies such as devaluation may dampen foreign investment, they can help protect local industries from competition by foreign investors. Such policies may lower the level of importation thereby increasing the cost of imports (Foot et al. 2003). When cordial diplomatic relations exist, the state becomes involved in the globalization and liberalization processes. These eventually result in global capitalism whereby large multinational companies command significant economic power globally. The state is involved endless negotiations with multinationals that in turn negotiate with other firms so as to reach an agreement thereby undermining its autonomy. Such economic relationships influence the state to embrace a corporate logic and accept the options of neo-liberal philosophy to validate socially unsettling and conflicting outcomes of its policies and endangering its local institutions to cost-cutting actions such as retrenchment and downsizing. As such, the state loses full autonomy especially in financial decision making. It also withdraws from the welfare sector thereby enhancing commercial interests through generation of circumstances that are favourable for international expansion (Hill, 2014). Proponents of neo-liberalism argue that economic development can only be accomplished through liberation from unwarranted government control and reduction of bureaucracy. The absence of government control is expected to increase market efficiency, promote economic growth and release the innovative drives as well as entrepreneurship of people. Consequently, benefits resulting from economic growth are expected to be felt in all levels of the society as development progresses (Hill, 2014). Opening up of the economies of the developing world has certainly generated prospects never seen before. Nevertheless, the nations have benefited differently depending on the level of preparedness. China for example commenced economic reforms with sufficient watchfulness of its financial infrastructure. Many Third World countries did not have such level of structural preparedness before engaging in economic reforms, hence have not benefited from globalization, liberalization and privatization due to their relatively poor socio-economic conditioning. The huge majority of uninformed, unskilful and malnourished populations are getting further relegated and left out from the course of economic development affiliated to globalization as they are not prepared with regards to availability of openings to participate in the global market place on equal basis with the more affluent units of these new world order (Stubbs & Underhill 2006). Instead of promoting equity and creating benefits along all the social strata in developing countries, neo-liberalism and globalization are perfecting inequality between countries and within nations. FDI inflows are uneven between countries with less than 15 nations sharing 78% of the total global FDI inflows to developing countries whose economies continue to thrive. The other share goes to more than 140 nations whose prospects are likely to continue diminishing especially if they continue relying on the exportation of primary products (Hill, 2014). Conclusion Neo-liberalism is an imperfect economic model that promotes growth in the developed economies while exposing the developing countries to risks through unwarranted economic and structural reforms. The decision to open up the domestic economies of developing countries is as a result of the global influence and the proposition that economic growth cannot be achieved without liberalization of the market. Governments of developing nations are encouraged to relinquish their role of regulating markets to encourage international trade. Neo-liberalism has successfully been entrenched in virtually all economies globally, but the equitable distribution of benefits is questionable. The developed economies have been the major beneficiaries of neo-liberalism and globalization while most of the developing economies continue to languish in poverty. The economic reforms demanded by international financial institutions such as IMF and World Bank are predisposed towards favouring international expansion of multinationals from developed countries in to the developing economies. Nation states need to evaluate the impact of such reforms on the domestic economy as well as the local level of preparedness with regards to financial infrastructure before embarking on major institutional restructuring. References Foot, R., Gaddis, J. L., & Hurrell, A. (2003), Order and justice in international relations. Oxford: Oxford University Press. Hill, C. W. L. (2014), International business: Competing in the global marketplace. Guilford, Connecticut: McGraw-Hill/Irwin Stubbs, R., & Underhill, G. R. D. (2006), Political economy and the changing world order. Don Mills, Ontario: Oxford University Press. Woods, N. (2001), “Making the IMF and the World Bank more accountable” International Affairs Journal, 77, 83-100. Yovanovich, G. (2003), The new world order: Corporate agenda and parallel reality. Montréal: McGill-Queens University Press. Read More