Neoliberal Policies and World Development - Essay Example

HAVE NEOLIBERAL POLICIES BENEFITTED PEOPLE IN DEVELOPING WORLD SINCE 1980? By of the of the of the School City, State 12 July 2014 Trade liberalization Before the world trade liberalization was introduced in most countries around the world, countries had implemented severe trade regulations to protect their economies. Countries had developed most of their economic and development strategies focused inwardly to the subject nation. There were many reasons why many States choose to adopt the new reform of trade liberalization for the expected benefits it held for investments and development. One, there were anticipations that exposure of domestic producers to additional importation of foreign products would enhance greater competition and force the production factors to change. If more foreign products came in, the home producers would be forced to improve their production quality and quantity, to survive in the market. Second, reformers believed that it was the key to higher investment in technology from abroad to boost their production. For a developing country to compete in the same field with the industrialized nations and survive, it had to offer the best products and services in the market. This was a strategy for most marginalized corporations to allow them access to foreign technology in the wake of trade liberalization. However, the outcome had variations between nations. Despite trade liberalization in different parts of the developing world, the trend in the 1990s indicates that “the results of trade reform have varied and sometimes fallen short of expectations” (Worldbank, n.d., p. 133). Effects of Import Liberalization on Korea and Tunisia Considering the crisis in the Korean economy in 1980, the government had to effectively seek a solution to it, before things got out of hand. There was a lot of pressure for the industries, especially the heavy and chemical industries (HCI), which had no option but rationalize or merge to survive. The Korean government implemented import liberalization in two faces, which were centred on reduction of tariff rates. The mid 1990s had seen imports in Korea rise by approximately 18 per cent, compared to the tariff rates for the manufactures that declined by almost 6 per cent (Yang, 1999). The Korean move to imports liberalization, which was an existing trend among developing nations was the trigger for the pressure in the domestic markets, especially in the manufacturing sector. As the import restrictions reduced, more imports as compared to exports weakened the economy. The domestic prices reduced, which resulted to reduced profit margins not only for the economy as a whole, but including business people. Trade liberalization led to one problem after the other, reducing profit rates, price behaviour for the commodities purchased by the people and eventually, wide development of trade deficit. According to Kim, with the increasing trade deficit and the deteriorating external balance, Korea experienced a financial meltdown in 1997, which forced its domestic stock prices to plunge, while the exchange rates rose (2000). Restrictions on the tariffs in their implementation of liberalization ended up chocking their domestic market and exportation. Tunisia also had similar experiences affecting the domestic pricing behaviour. Most of the existing businesses were well regulated by the government, though their market was much restrained domestically. The oil rich country was under excessive protectionism against encroaching free trade. The problem that had persistent for years involving the government and the trade unions, the fall of oil prices and the oligopolistic market structure forced the nation to implement trade liberalization (Saggay, Heshmati and Dhif, 2007). It is expected that with global trade liberalization, the product prices would rise. However, the liberalization of domestic trade would reduce domestic prices compared to world prices. Though Tunisia is known to have experienced significant inflows of foreign direct investments, in the long run, import penetrations into its economy and the competition negatively affected the domestic pricing. This is not only regarding oil, but agricultural producing nations in Africa, whose main source of exports relied more in these products. The pricing behaviour has been very critical to their standard of living and their level of income. With the high prices of products, individuals could be able to produce a surplus and sell more into the market, which is quite difficult when the domestic market is clogged with imports. The people in the developing nations end up hurt, especially from their low earnings from the reduced pricing behaviour. Enhanced Consumer Choice A lot of commercial businesses offering goods and services at varying prices exist today than they did some three decades ago. Enterprises from the industrialized nations can be located in the interiors of the third world countries today ranging from healthcare provision, oil and mineral production among other investments. Several companies existing abroad have been relocated to the developing nations to ease the costs of production. The locals in the developing world have in the modern times been given opportunities to make a choice among the various producers of goods and services for what they offer, unlike during the liberalization era of the 80s where consumers would have to pay a high prices just to get or access a particular limited service or product whose production was restricted in the local market. It is evident in modern markets that the consumer is perceived as sovereign and basically serves to legitimize the free market, such that “it was not entre-pruners or producers who ultimately determined the course of economic affairs but consumers” (Sagepub, n.d., p. 31). Basically, whether poor or wealthy, the power to purchase lies with the consumer. The governments in the developing countries have had to advance their services and products to compete effectively with what foreign and private investors can offer. For example, China has in recent years been described as a producer of products at low cost. Third world nations have not hesitated to accept their trade for the low cost goods that are preferred by the consumers. The consumer interest seems to change with various factors in the economy and trends. The pricing of the product and the reputation of the origin country or company substantially influences their choice. Trade liberalization has given people around the globe enough bargaining power for the choice of the products they are willing to spend on. It is not only about the item itself, but the value it brings, its quality, content, package, safety, and pricing before quantity. Many have termed China as the next economic power in the world, perhaps because of its wide acceptance of investment in the developing countries and economic penetration around the globe in terms of exportation to the foreign nations that is affordable, even to the low income earners. Governments and the common citizens have developed a favourable opinion towards the Chinese products and services. Because of the reduced trade tariffs in the African nations and the low cost they charge, preferred Chinese products are cost effective to the people in the developing world. In the competitive market, a consumer would choose to import household items rather than buy the locally produced items. Unemployment Proponents of foreign trade liberalization hold that it is the key to creation of new employment opportunities for the people. Nevertheless, this is contestable because it only occurs for the minority. Focusing on the society in the developing world, majority of the people were not highly educated or skilled to be assimilated into the new developing jobs. Though the situation has improved, and many can be employed in the white collar jobs or be creative enough to set up their businesses, trade liberalization seems to favor the developed nations more than the developing ones. According to Ozturk, “liberalization of foreign trade has meant removal of barriers in developing countries, and a maintenance in the developed ones, which has given birth to an unfair international trade ” (2011, p. 91). High import levels in developing countries acted to push out performing local production and common citizens out of business. Circulation of foreign goods in the free market was a stiff competition to local produced goods like electronics, household appliances, textiles and partially the foodstuff. Consider an example of what the developed nations export compared to the exports of developing nations. While the countries in Africa rely heavily on agricultural exports abroad, nations like the US and European nations rely on the processed products. Basically, exporting processed products is more profitable than the raw materials from agriculture. WTO explains that price for basic commodities which the LDC nations rely on have low returns due to reducing prices over the decades; to maintain their incomes they have to more than double their production or venture in processed products or skill intensive jobs (n.d.). The low income earners end up victims to the liberal trade. They end up purchasing processed products at high prices, compared to the prices they sold the raw materials to be processed at. Similarly, investment from the foreign nations did introduce sufficient automation and technologies in the industries, which was the initiation for massive layoffs, especially for less skilled and computer illiterate employees. Jobs that required an array of people to be accomplished took less time and operators for an equivalent task. Despite being a benefit to the employers in the LDC nations, majority were those either reassigned to other lesser tasks or terminated. It is necessary to note that even if the early 1990s were marked by increased wage and employment in most of the LDC and industrialized nations, developing unemployment rose in East Asian countries due to the financial turmoil. While Asian nations recovered from the crisis and switched from basic commodities to infrastructure, technology and services industries, nations in Africa were left behind; this explains the almost stagnant wages and nations’ incomes. Social Inequality The rapid openness of developing countries to trade produced different effects to the society in relation to their employment and income distribution. The learned people had the advantage over the unskilled individuals who relied on casual manual labour. Relating with Goldberg and Pavcnick’s (2004) research, there was evidence of increase in skill premiums in most developing and emerging countries, where the returns for specific occupations that required high education, such as professionals and administration rose. The introduction of the economic reforms within these countries needed well acquainted persons with knowledge in policy development, implementation and control. Where the unskilled labour intensive industries were best hit by the reduction of tariffs, their industry wages and premiums proportionately declined. The contribution of increased market competition from trade liberalization would result in reduction of employment in both the formal and informal sectors depending on the flexibility of the labour market. Factoring the introduction of technology into labour intensive markets, wage inequality could not be escaped in the international trade. A clear example existed in the Latin American countries demonstrating a widening gap in wage inequality, due to the change in the structure of labour demand in favour of the skilled workers and low returns for employees with less education and skills qualification (Vos, 2002). Despite the numerous explanations given to the outcome, the fact is that the intensifying globalization had pushed a large group of the people in the low pin informal sector. For Brazil, Mexico and other Southern American countries, they experienced a rise in wage gaps in relation to the trade and financial liberalization between the mid-80s and mid-90s, where high income remained relatively high compared to the average minimum wage for the less skilled (United Nations, 2005). Hence the living standards of the skilled group improved as the absolute poverty of the less skilled soured. The wages earned by employees affected per household income and expenditure, which also led to wide variations between them. Following the “evidence from the 1990s it suggests that even in instances where trade policy has reduced poverty, there are still distributive issues” (Worldbank, n.d., p. 134). However, you must appreciate that liberalization actively contributed to the expansion of resource based industries in LDC countries. It is also right to state that new economic policies in the developing world contributed to higher relative wages though inequality persisted. Development and Knowledge Transfer One of greatest defence for LDC countries for their lagging in developmental projects has been claimed to be lack of know-how and experience. Countries heavily relying on agricultural products for their exports have and continue to gradually shift into other sectors of production, such as technology and service provision. Since the neo-liberal era, developing countries have massively improved in skills development and literacy levels, which are subject to development progress, investment, introduction and expansion of technology driven industries. According to Tsidell and Sen, globalization continues to “enable developing countries to obtain essential knowledge and technology easily at a low cost, without having to re-invent the wheel” (2004, p. 25). Through colorations of foreign and local higher learning institutions, people in LDC have acquired high level of technical expertise and knowledge to compete in the global market. Businesses among the common citizens are no longer restrained to the agricultural sector, because people have learned new tactics to compete effectively and invest in heavy technology industries. Creativity and innovation are well promoted among the youths and workers all through from the education systems to the workplaces. More productive workforce continues to be produced in the LDC and serves to boost their economic status through entrepreneurship, or employment in high ranking positions and companies around the globe. Appleby point outs out the newly industrialized nations of Eastern Asia as examples of previously developing countries that have realized not only higher level of income per head, but “economic growth after heavy investment in education and training” (2010, p. 40). Compared to the imperial age where ownership and management of companies was awarded to the colonial regimes and close leaders or workers on merit, today the awarding systems on employment and promotions highly rely on knowledge and experiences to steer private and public enterprises ahead. Learning and technology transfer in this age is fundamental for them to compete in the labour market. There many individuals from the developing and emerging nations that currently head multinational corporations all over the globe. Some have been poached by influential companies for their competitive abilities, while others have emerged to be business tycoons in their regions. With the freeing of the labour markets, people from LDC countries can move abroad for expansive investment and further training that is later transferred back to the locals, especially in technology and engineering sectors. Progressive Privatization Privatization of the state owned public enterprises is one of the non-financial market reforms that have yielded improved efficiency in production and returns. There are numerous benefits ranging from enhanced consumer choice, efficiency, and quality of products realized in developing countries after privatization in the free market economy. Initially, public enterprises were highly regulated by the governments from their pricing, ratios, and access for services or products. Privatization has produced different outcomes among people across the world as the power to hire among other wage related factors are passed to private ownership. First, it promoted employment at varying degrees, but with a bias to the recruitment and selection procedures of the companies. Privatisation has created new opportunities for low and high skilled workers. However, the benefit of privatization in controlling market prices is sceptical considering the escalating high cost of living over the past decade. Though issues of inflation cannot be ignored, it is evident that privatization has facilitated business expansion, easier access of products and massive control of prices (high or low) for the people in LDC (Birdsall and Nellis, 2002). Although the distribution of assets is still poor, privatization has definitely brought tangible benefits and especially at lower prices for the marginalized people in LDC. However, there are obvious winners and losers in the process. The fear of job loss is central for most employees in the privatization deal, while the elites such executives and investors reap far greater benefits. For example, King mentions that privatization laws in Algeria after the mid-90s turned out to be instruments of self-enrichment for the people in power, especially the military officers and the ruling class clan (2009). In addition, due to increased competition for employment, privatization to some has implied that they have to take or leave job packages with lower pay or fewer benefits. IMF Bailouts and Domestic Institutions Since the 1980s, countries have entered into different trade agreements across the regions and continents. They engage in trade activities and maintain foreign relations that are essential for the progress of their economies. Based on the historical trend of the Third World countries in terms of development, their budgets influenced by the low profits from exports and stock markets cannot fully finance their development plans. Places like Africa have heavily invested in development of infrastructure in the last decade, but most of their financing comes from world financial organizations (World Bank, IMF, Pan African Bank, loans from EU, financial stable countries or partnership agreements). The financial liberalization around the world has benefitted LCD governments and their financial institutions to aid in easing the financial strain in the economies. In times of inflation and financial crisis, integration of financial crisis has assisted LCD countries to “borrow capital to smooth consumption in the face of adverse shocks” and reduce the risks with the international markets (Agenor, 2003, p. 1090). Through this financial integration, financial domestic institutions can access funds, which willing business people can loan for business establishment and expansion. Even with the higher interest rates, people can access funds for their businesses operations and maintain their livelihoods rather than terminating their jobs. The policies of IMF, World Bank and other international institutions have provided billions of dollars to developing countries as bail-out packages. However, as the LDC nations continue to receive these packages, their external debt to foreign institutions continue to rise. The original intent focused on providing assistance for short term balance of payment problems seems to fade away and effectively causing loan addicts rather than closing down (Vasquez, n.d.). The world’s poor carry the burden of repaying the loans, as these costs are passed down to the consumer through taxations. Other benefits To steer transaction intensive markets in the developing world, similar platforms for technology and communication infrastructure have been implemented in the LCD just like in the industrialized nations. Businesses competition levels are heightened and sourced out if need be which promotes neoliberal societies. Globalization has brought people together through social networks, while the business, consultancy and trading activities have been automated and facilitated people in LDC to explore areas of virtual market competitively other than traditional commerce. Another benefit to the people is enhanced democracy in labour market and associated rights in employment. It was also to the people’s advantage that the developing nations were gradually turning into neoliberal states, which Haque explains as “economic individualism based on market competition, to encourage free trade and foreign investment, and oppose state intervention and state-run welfare program” (2008, p. 13). It is worth mentioning that some of the developing nations were reluctant to privatization policies for security in employment. Labour unions had to engage in active consultation to ensure privatization and dismantling of welfare state was not a strategy to lay off employees. Relaxation of the labour and immigration regulations in the industrialized nations has contributed to massive labour flow abroad. Though labour regulations are more inflexible in LDC countries than abroad in pursuit of protecting the domestic labour industry, thousands of people have acquired employment in the industrialized economies. Conclusion The impacts of neoliberal policies since 1980s in the developing world have generated both positive and negative effects. Most of these benefits varied with the implementation of policies in the countries. Neo-liberal policies have facilitated intense trade activities, created opportunities for employment, access to credits for business expansions, enhanced economic power, growth and consumer choice, and controlled pricing among others for people in LDC. Effects of unemployment, social inequality and widening inequality gap among people were also experienced in certain countries, which contribute to persistent poverty rates. Reference List Agenor, P. R., 2003. Benefits and Costs of international Financial: Theory and Facts. [online] Available at: [Accessed 14 July 2014]. Appleby, R., 2010. ELT, Gender and International Development. Bristol: Multilingual Matters. Birdsall, N. and Nellis, J., 2002. Winners and Losers: Assessing the Distributional Impact of privatization. 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