5

1. Relacoes Internacionais e
Desenvolvimento
A. Pereira
PRI 5058
Lecture 5
Neoliberalism

2. Questions
• What is neoliberalism and what are its
origins?
• Through what mechanisms did
neoliberalism become a globally dominant
ideology and set of practices?
• What is the record of neoliberal approaches
to development?
• Is the era of neoliberal dominance over?

3. Outline
• Examples
• Origins
• Emergence
• Diffusion
• Ideas and practice – strengths and
weaknesses
• Decline?
• Conclusion

4. Examples of neoliberal policies
• ?

6. Some examples
• Privatisation of SOEs and state infrastructure
(airports, roads, railways, ports, etc.)
• Liberalisation of capital markets
• The “flexibilisation” of labour markets
• The privatisation of state pensions
• School vouchers

7. Other features of neoliberal
reform
• Reductions in the fiscal deficit (cut spending, increase
revenues, or both – in practice, often meant cuts in spending
and investment, reductions in state salaries and personnel, and
elimination of state functions)
• De-regulation (or more accurately, re-regulation)
• Reductions in tariffs, quotas, capital controls, and other
impediments to trade and investment (economic “opening”)
• Privatisation of state-owned enterprises
• An increase in exports and facilitation of debt repayment
• Decentralisation of some state functions
• Reduction of tax burdens

8. Neoliberalism as theory
• Representative theorists: Friedrich von Hayek; Milton
Friedman; Sebastian Edwards. [Note: they would consider
themselves neoclassical economists or libertarians.]
• Major influences: neo-classical economics and the Austrian
School of economics.
• The market as “natural” and in need of protection by a
strong rule of law and a minimalist, but effective state (see
Hayek on the rule of law)
• State intervention distorts market incentives and usually
makes social outcomes worse. The cost of nonmarket
allocation of resources usually outweighs the benefits. State
failure and “rent-seeking” by states is a bigger problem than
market failure.
• Most states should be “rolled back”, with many of their
functions replaced by markets.

9. Alternative theoretical positions
• New institutional economics (Coase, North, Williamson,
Stiglitz)
• Markets are imperfect more often than neoliberals allow, and are
marked by information asymmetries and transaction costs.
• Effective institutions (both state and non-state) are needed to lower
transaction costs and facilitate market transactions – institutions such
as judicial systems, property rights regimes, regulatory agencies,
central banks, insurance, etc.
• Neostructuralists/neo-Keynesians (neo-developmentalists;
i.e. Ha-Joon Chang, Paul Krugman, L.C. Bresser-Pereira)
• Developing economies differ fundamentally from advanced capitalist
economies.
• Significant state activity is needed to overcome market imperfections-
more activity than advocated by new institutionalists.
• Elements of the desarollista or import-substitution industrialization
(ISI) model were more effective than neoliberals claim
• (Also versions of what we have studied so far: Marxism,
dependency theory, post-development, etc.)

10. Origins
• F. von Hayek, The Road to Serfdom (1944).
• 1945-71: a period of embedded liberalism in the world
economy (state mediated capitalism with strong labor
rights, curbs on capital mobility, welfare rights, Keynesian
demand management and some degree of state planning).
• “Stagflation” challenged the Keynesian orthodoxy.
• The oil shock of 1973-4 put “petrodollars” into the world
economy, and by borrowing these many developing
countries sustained ISI during the 1970s.
• The Pinochet reforms in the 1970s were an experiment in
neoliberal reform.

12. Origins
• Chinese economic reforms under Deng
Xiaoping beginning in 1978
• The second oil shock of 1979
• US interest rates rise
• Thatcher elected in the UK in 1979
• Reagan elected in the US in 1980
• The 1980s: a debt crisis in much of the
developing world, in which capital flows
were from developing to the developed
world

14. Emergence
Neoliberal reform in Latin America in the
1980s and 1990s
• Africa: IMF structural adjustment policies
• India: liberalization beginning in the 1990s
• East Asia: the crash of 1997
• Neoliberalism as an arm of US foreign
policy: `free markets + democracy’

15. Diffusion: the Washington
Consensus
The “Washington Consensus” described by
Williamson (1989) included:
• Fiscal discipline
• Reduction of subsidies and investment in
infrastructure, education and health
• Tax reform (lower marginal rates and broader base)
• Interest rates that are market determined
• Exchange rates that are market determined
• Liberalization of trade and investment
• Legal security for property rights
• Privatization of SOEs

16. The rise of Japan: a
developmental state?

17. The role of the IFIs
• World Development Report: Trade and
Industrialization (1987)
• The Japanese government reacts
• The East Asian Miracle: Economic Growth
and Public Policy (1993)
• World Development Report: The State in a
Changing World (1997)

18. Theory, prescription, practice
• Understanding the difference between neoliberalism as
theory, prescription, and practice helps unlock the current
debate.
• Neoliberals argue that the reforms’ disappointing results
have more to do with incomplete and/or distorted
implementation of the policies, and that the policies and
the theory behind them are still fundamentally sound.
• Critics argue that the last three decades of reform show
that both the theory and the prescriptions have been tried
and have been shown to be inadequate.
• There are now many critics in the advanced capitalist
countries, who attack neoliberalism for undermining
national cohesion.

19. The Politics of Neoliberal
Reform
• World Bank’s first SAP (1979).
• IMF and World Bank promote economic
liberalisation (not contemplated in Bretton
Woods accords) by attaching conditions to
new lending (“conditionality”). The region
most directly affected: Latin America,
followed by Sub-Saharan Africa.

20. Neoliberals raised the question of the
optimal mix of state strength and scope
Low scope high strength High scope high strength
Low scope low strength High scope low strength

21. Mexican SOEs, 1930-1980
1930 12
• 1940 57
• 1950 158
• 1960 259
• 1970 491
• 1980 1,155
– Source: Williams (2001): 62.

22. The Mexican public sector, 1970-
1983
• Public sector employees
• 1970 616,000
• 1976 2.1 million
• 1983 3.3 million
• Increase in public sector budget 1970-76:
116% (GDP increased 51%)
– Source: Centeno (1994): 82.

23. A justification for neoliberal
reform
• Pedro Aspe, Finance Minister in Mexico in address to
Congress in 1989:
“The crisis has shown us that a larger State is not necessarily
a more capable State; a State that owns more is not
necessarily a State that is more just. The truth is, in Mexico,
more State has meant less capacity to respond to the social
needs of our fellow countrymen and, in the end, greater
weakness of the State itself. All the time the activity of the
public sector was increasing, attention to the problems of
highest social priority was decreasing.”
Source: Dominguez (1997): 132.

24. Problems with ISI
• Little state leverage over stagnant firms
• Dualistic labor market economies
(privileged formal/state sector, deprived
informal/private sector)
• SOEs often used for patronage
• High state debt – this often fuelled inflation
• “Rent-seeking”and predation

25. Who implemented neoliberal
reforms?
• ?

26. Implementation
• Insulated, technocratic elites in the
executive, working with IFIs (“technopols”)
• Lots of PhDs in Economics
• Tight international networks (the example
of Foxley, Aspe, Cavallo – all studied
together at MIT under Rudiger Dornbusch)
• Pedro Malan, Finance Minister of Brazil
(1995-2003) had been at the World Bank

27. Tensions in the politics of reform
• Neoliberal reformers sometimes used tactics for building
political support that undermined the logic of their
economic policies. For example, President Carlos Menem
(1989-1999) in Argentina allowed governors to run fiscal
deficits in the provinces in order to retain their loyalty, and
President Cardoso in Brazil (1995-2002) used public
resources to buy political support for a second term in
Congress.
• Sometimes candidates campaigned against neoliberal
reform and then implemented it once elected (i.e. Menem
in 1989, Fujimori in 1990).

28. Some positive results of
neoliberal reforms
• Some resumption of growth
• Relative price stability
• Fiscal imbalances often corrected
• Mitigation of debt crisis
• Increase in exports
• Improved services in some sectors (i.e.
telecommunications)

29. Some negative results of
neoliberal reforms
• Low growth
• Little improvement in firm management and
productivity
• Widening inequality – emergence of new
super-rich elite
• Little poverty reduction
• Financial and economic volatility
• Environmental and social deterioration
• Decline in state capacity – state
disintegration

30. The

33. World Inequality Report 2018, by F. Alvaredo, L. Chancel, T. Piketty, E. Saez and
G Zucman and released by the World Inequality Database

36. From the World Inequality Report 2018

38. Conclusion
• It is important to distinguish between neoliberal theory,
prescription and practice.
• Part of the appeal of neoliberalism is that it seems to fit the
“common sense” perceptions of many in business and it
also appeared to be a solution to the crisis of the ISI model
and the debt crisis.
• In some sectors the replacement of state allocation of
goods and services by markets appeared to work well (i.e.
telecommunications). In others it did not.
• In some countries privatizations were dominated by a
small coterie of oligarchs (Argentina, Russia) whereas in
others private ownership was more broadly shared.

39. Conclusion
• The high water mark of the neoliberal wave was probably
the mid-1980s to the end of the 1990s, when the
“Washington Consensus” was dominant.
• The 2008-9 financial crisis dented confidence in neoliberal
practice.
• The Washington Consensus was replaced by a “post-
Washington Consensus” – a “new institutionalist”
emphasis on “second generation” institutional reforms and
compensatory social programmes such as conditional cash
transfers (CCTs).
• US foreign policy has changed: The “Trump Doctrine” is
supposedly about a “return to national sovereignty;
national interest; reciprocity in international relations and
trade; burden sharing, especially in defense; and new
regional partnerships for particular crises” (Kiron Skinner).

40. Conclusion
• Is the neoliberal era over?
• Yes, if neoliberalism means the market fundamentalism of
the Washington Consensus. (The latter probably never
enjoyed the support of the majority in developing countries
in the first place.)
• No, if neoliberalism means market-oriented development
characterised by export-led growth, openness to foreign
capital, and low rates of trade protection. While the latter
orientation has waned in the current nationalist and
protectionist climate, it is still the default position for many
governments, multilateral institutions and aid agencies.