Impact of Neo-Liberalism on Inequality within Developed and Developing Countries - Coursework Example

Impact of Neo-liberalism on inequality within developed and developing countries By Research Paper Submitted to ----- Student registration number: Group number: Name of Supervisor: Date: Introduction The recent downturn in the world economy and the recession that have gripped most of the developed and developing nations of the world have brought into sharp focus once more the debate on the merits of Neo-liberalism. Neo-liberalization can be described as a process by which the economies of various nations have integrated themselves, especially by easier movement of goods and products across national and international boundaries. Neo-liberalism is generally defined by “heightened levels of flexibility and individual autonomy in the realms of economic conduct and daily life” (Binkley 2006, p. 243). Instead of a government controlled “welfare apparatus” regulating labor, mobility, consumption and defining lifestyle standards like in totalitarian states, the individual is given a high degree of personal freedom. The motivation for individuals to be enterprising and productive is this personal freedom which allows them to use the income earned through economic activities in a manner they see fit. Personal identity and lifestyle choices are made by the individual. Capitalism thus promotes a culture of self-reliance and personal freedom (Binkley 2004). The individual enjoys maximum autonomy in a capitalist society. Conspicuous consumption becomes the means through which individuals assert their status and their economic positions, since goods have symbolic meanings. Capitalism promotes a culture of indulgence, where individuals are constantly told to buy more and be happy, and in which constant gratification of one’s own wants is not looked down upon as greed or avarice, but is instead glorified. Many economists agree that neo-liberation is highly beneficial. However, as many economists also argue that neo-liberation is detrimental to the economic, political and social wellbeing of different groups in various countries. History provides details on the actual definition and view of whether or not 'neo-liberation ' can indeed be considered to be liberal. Shah notes the role that political decisions, military might and power in general has played in shaping trade (Shah, 2006 pp 2-3). Opponents of neo-liberation suggest that developed and developing nations are at different growth rates and have different needs thus neo-liberation would be more beneficial to the developed nations while developing ones gain less and are merely overburdened. Arguably, developed countries are masters of their own economies and act depending on their interests but less developed nations have few choices but to fall into the existing trade 'weather.' From international political, international economic, domestic political/institutional and domestic economic/societal perspectives, different countries either reduce or apply different levels of restrictions and barriers with regard to neo-liberation . Impact of Neo-liberation In the area of labor market, trade liberalization generally has mixed impact due to its capacity to improve employment and increase wages. However, in terms of government budget, its impact is dependent on several factors, such as the composition of tariff revenue in the budget. Thus, various governments have all the options in setting up their respective taxes just to replace any revenue lost they might incurred through trade liberalization. Indeed, the decision of the government and trade reforms from different income groups could have strong influence on the overall impact of trade liberalization to the poor (Feenstra, 1996). Many of the economists are convinced that open economies are much better in the long run, than the closed ones. Thus, trade liberalization has strong relation in the presence of open policies that significantly contribute to country’s development. However, some financial analysts have fears that in the shorter run, openness in trade could directly harm poor communities in the economy, might as well leave some people behind poverty in the longer run (Anderson, 2009). In evaluating the nature of trade liberalization, it implies adjustments so it basically involves distributional impacts. Having this context, financial analysts and economists are trying to assess to what extent are the poor might suffer its adverse effects. Apparently, it is not easy to derive empirical irregularities between poverty and trade liberalization despite all the historical instances which the latter is identified as main economic shock. In this regard, it is best to rely on the evidences regarding trade liberalization and poverty individually, including all the policies and other components that linked them. Basically, poverty is a multidimensional phenomenon and very complex, and it is hard to measure it. Most often, economists relate poverty to consumption metric or in the level of income. Several studies reveal that trade liberalization or fee trade is better than no trade, since it significantly enhance economic growth and export earnings. Indeed, there are many countries especially from South-East Asia that have attained significant growth in the economy due to their existing trade policies. Aside from the growth in their economy, their poverty levels also decline significantly. Thus, their trade reforms actually generate not only winners, but losers as well. In the case of most developing countries, their participation in the international trade actually improved their per capita income; some of these countries significantly decline their poverty level, but others have worsened. Through trade openness, the foreigners and nationals can transact with uncertainty, delays, or any artificial costs. Many economists believe that trade openness is highly desirable, since it reflects the international marginal rate of transformation in competitive economy as equated with domestic prices towards a more efficient resource allocations (Meschi, 2009). Based on traditional trade theory, openness in trade through reduction of export and import impediments are the most effective strategies fro growth. Through trade liberalization, there is more efficient trading due to increase in production according to comparative advantage. Neo-liberation, some economists argue, allows an economy to take advantage of opportunity cost, by acquiring what would otherwise not have been qualitatively produced within its economy while at the same time remitting its best to the outside world thus positively affecting all macroeconomic variables and its economy as a whole. Labor costs, Ricardo accentuated, greatly determined the economic growth rate of a country- with specific emphasis on the theory of value and theory of distribution, both of which were tied to labor costs. Adam Smith noted the value of labor and put forward the absolute advantage principle where he insisted that by fully and efficiently utilizing its labor, a country has ability to produce more and better products than its competitors, using the same resources. From another perspective, neo-liberation has been detrimental to many economies and political landscapes. The service sector has experienced massive deregulation in trade and thus resulted in unbalanced development. Brain drain has been common in the past few centuries. As the poor, underdeveloped countries struggle to provide education to their most brilliant population, particularly in the health sector; the developed nations attract them away. This has always left these poor countries, particularly in Africa and Asia, with few medical personnel in critical areas of their economies- the health sector- thus these countries remain poor and underdeveloped. Partly, this is attributed to the massive corruption in such countries accompanied by low pay, yet as Shah notes, this is all attributed to structural adjustment programs which directly control the economic and political decisions in such countries. Definitely, the less developed nations do not benefit much in this aspect. Many other issues affect developing countries as a result of neo-liberation . Environmental degradation, low wages and destruction of existing labor unions have also been evident (Shah:, 2006 pp. 3-5). Other neo-liberation opponents argue that protectionism and open market policies are often applied in an unequal and unfair way. Developed countries compel the poor, developing countries to open up their markets to goods from the developed countries' industries. This is done directly through political influence or indirectly through economic implications- such as through neoliberal policies which emphasize structural adjustment programs. Consequently, poor countries are forced to lift barriers to neo-liberation. While this is done, the industrialized countries on their part provide heavy subsidies in their home economies such that it becomes literally impossible for industries from the developing world to export goods to the former's market as is evident in North America and Europe where farmers receive billions of dollars in subsidies thus making it harder for poor countries to export agricultural produce to such countries. Furthermore, the developed countries have created 'neo-liberation areas’ where goods from outside such 'areas' are levied higher thus discouraging free and fair trade ( Shah, 2006 pp. 3-5). Many developing nations have been advised and constrained by the International Monetary Fund to concentrate on producing and exporting agricultural products rather than diversify into industry and technology but, as Brinkman states this has resulted in falling of prices for these commodities due to the market being bogged down by similar goods thus affecting employment and economic growth. The pure trade theory overlooks each individual country's potential and thus limits economic growth (Costantini, 1999 pp. 2). It is widely argued that the exchange rate may affect decisions about neo-liberation - whether or not to place barriers on imports. an appreciating exchange rate may serve to increase protectionist pressures because such an exchange rate increases imports and reduces exports hence domestic balance of trade preferences are affected (Milner 1999, pp.99-100). Still, other economists observe that exchange rates have little, if any, effect and can hardly affect decisions on whether or not to place barriers, arguing that devaluation often causes domestic prices of imports and exports to rise. From a domestic economic perspective, Milner notes the role played by political institutions in shaping trade policies. The state's administrative capacity, he points out, determines the policy to be adopted. In developed countries, there are fewer trade barriers in comparison to the developing countries because in the former, there is a well developed tax collection system hence trade taxes are easily collected but in the developing world, tax collection is cumbersome yet such tax accounts for a large portion of the total revenues in the economy. Developed countries, Milner notes, thus do not fully rely on import taxes for their revenue due to a large institutional capacity. It is also widely argued that the industry's characteristics determine whether or not it will be regulated, and if so to what extend- protectionism? Industries characterized by low skills and which are labor intensive and which have high import penetration face high protection. Multinationals and export-oriented industries engage in freer trade with few, if any, barriers at all. Trade barriers too have a domestic political attachment and impact. Two sides exist regarding the role that the type of political regime plays in determining whether or not trade barriers will be imposed. Some scholars observe that democratic regimes are less likely to apply trade barriers because they are not rent-seeking. Autocratic regimes however, are rent-seeking hence they will apply protectionism in order to acquire rent. Other scholars however argue that trade presents a political conflict hence democratic regimes will want to protect their economies by applying protectionism against one another except in cases where trade between the two countries is intra-industry and absolutely necessary (Milner, 1999 pp. 102). Neo-liberalism and Poverty Reduction The increase in global poverty reduction can be directly traced to the employment generation which Neo-liberalism brings in its wake, especially among countries with large human resources which are more often than not the ones who have the greatest number of people living in poverty. The access to more jobs is one of the greatest tools of poverty reduction which can be attributed primarily to globalization. The global economy and its wide reach are expected to ensure that all people around the world are given access to work that is productive and adequately remunerative. This kind of work will at the same time benefit the world citizenry by providing “employment creation, promoting human rights at work, improving social protection, promoting a social dialogue”. Thus the process of Neo-liberalism seeks not only economic and financial benefits, it lays equal stress upon equality and social justice which are some of the key aspects of Neo-liberalism, but which are often shrouded by the importance given to economic benefits. The importance of increased trade and commerce to economic development and prosperity is a known phenomenon. From the time of the ancient trading routes and interaction between people during the search for new routes to the Asian nations, the driving force has been economic gains. The relation between enhanced trade and the reduction of poverty among peoples can be attributed most significantly to the access to better technologies and improved systems of production which developing nations can source from their more developed partners. At the same time, when people adopt newer means of production, it raises productivity and the lowering of trade barriers and the removal of protectionism creates bigger markets for the goods produced, bringing about an increase in finances and the chances for distribution of money to greater number of peoples. The power of increased trade and commerce and manufacturing to lift nations and peoples out of the morass of poverty is most aptly demonstrated in the success stories of China and India, two of the largest nations of the world in terms of population. The significant decrease in poverty worldwide can be attributed to the inclusive path adopted by these nations in the global economy and thus, by generating greater employment, large swathes of people rose above the poverty line. According to Chandy and Gertz, “…the two developing giants, India and China…alone are responsible for three quarters of the reduction in world’s poor expected over the ten year period” where the ten year period refers to 2005 – 2015. (P. 6) The power of trade and commerce to alleviate poverty has been well documented and while there has been much discontent about the actual outcomes of poverty reduction, it is important to understand that any failure in poverty reduction is due to inadequate national support rather than the ills of globalization. This anomaly occurs because of the dissonance between the stated policy measures and the actual means and methods employed in its implementation. For any policy to be effective, implementation is the most important aspect and if nations fail to promote and execute policy measure effectively, it creates gaps in delivery of economic benefits to its people. A very important aspect of globalization and its positive impact on poverty reduction can be seen from the fact that from 1980 onward, there may be said to be an exponential growth in the services and goods sector. According to an IMF report published in 2007, world trade grew five times in real terms (Hayashikawa, 2008, p. 7) and this reveals that the number of people employed in the task of producing goods and providing services also increased, leading to greater income generation through creation of jobs. The creation of new jobs entails greater opportunities for more people to seek employment, leading to alleviation of poverty. Another way in which globalization and increased production aid the reduction of poverty is by means of “reduced consumer prices.” (Bird, 2004, p. 50) Even with the limited financial assets available to them, the poor are able to gain access to a variety of goods and services which may earlier have been out of their reach. Harrison, quoting from Davis and Mishra, in her work on poverty reduction and globalization remarks that “the poor gain from tariff reductions on goods that they buy” while at the same time it leads to a corresponding increase in prices of goods produced by the poor and as such “poverty is likely to decline.” (p. 8) This is especially true in terms of better nutrition opportunities through access to more food, a relatively greater cleanliness level and the resulting decrease in diseases and better health which aids production. The increased access to nutrition is extremely pertinent for poverty reduction because malnourishment has been one of the reasons for poverty and vice versa. This positive impact of globalization on poverty reduction is aptly illustrated through the African experiment by Jeffrey Sachs, head of the UN Millennium Project and one of the most vocal proponents of globalization. In this context it is important to point out that poverty reduction and globalization are best seen in nations where social policies have been formulated to take care of people during the adjustment changes which integration into the global economy brings. Nations can be productive only when there is strong human capital, especially invaluable in the new knowledge and technology economy of today. The adequacy of human capital is at the same time related to good nutrition, sanitation and effective health care. Human capital can be made precious and invaluable when all groups of the population receive equal knowledge and health facilities which are possible only through policy measures. Thus globalization and poverty reduction can take place only through national policy making apparatus, willing to invest in the global economy as well as the welfare of their citizens. By increasing access to material resources and finances, globalization aids job creation which in turn ensures the well being of human capital, thus creating a sort of symbiotic relationship between globalization and human welfare. This positive impact of Neo-liberalism in some of the poorest areas of Africa exemplifies the importance of globalization for developing nations and Third World countries which are home to the largest number of poor people. As the African experiment demonstrated, it was access to better technology which was at the heart of positive economic development. While the positive relation between globalization and poverty reduction is undeniable, it is worth noting that nations that have integrated into the world economy on the basis of export strategy show very little poverty reduction. This is especially true for nations “where there is wide-spread poverty and most of the population live at or below income levels sufficient to meet their basic needs…” (Hayashikawa, 2008, p. 19) and since most of the national resources are diverted towards export, access to local resources is diminished, leading to stagnation in the economic situation of the people. One of the disconcerting aspects of poverty reduction and globalization is seen in the relative change in the economic condition of the rural poor who form a large proportion of the population in developing and underdeveloped countries (Harrison, 2007, p. 17) and this further bolsters the notion that globalization can aid poverty reduction only when national governments implement policy measures for labor movement. The aim of poverty reduction the world over, as perceived by the Millennium Development Goal can be achieved only when nations realize the merits of economic integration globally. It is also important to ensure that the birth pangs of integration are handled with greater caution, by ensuring that effective social structures and policies are put in place to facilitate integration, because despite the vociferous protests of opponents of globalization, global markets create “access to more capital, technology, cheaper imports and larger export markets.” (Globalization: A Brief Overview, 2008, p. 2) The presence of greater markets is directly related to increased productivity which in turn is related to higher wages. Higher wages are at the same time related to poverty reduction and thus, the inclusion of developing economies into the global arena is the panacea for poverty, which is most widespread in the developing and underdeveloped nations of the world. While globalization and poverty reduction are seen to be directly linked, there is vast literature that decries the benefits of globalization. While certain concerns raised by such researchers and thinkers is legitimate, it is important to remember that these objections are based more on previous beliefs and ways of thinking. Also, it is important to remember that the greatest criticisms leveled against globalization concerns the inequality of wealth distribution rather than wealth creation. The increase in incomes of different groups of people shows disparity, both in the speed of increment and the amount, but it is worth mentioning that “increase in per capita incomes have risen across virtually all regions for even the poorest segments of populations…” (Globalization: A Brief Overview, 2008, p. 5) While the incomes of the rich may have shown an exponential increase, the poor have also gained access to finances and opportunities which would have been unthinkable for them before the process of globalization manifested itself in the international economy. Conclusion The neo-liberation leads to increased inequalities where the rich become richer, and the poor, poorer. It has put the spotlight on knowledge and innovation, accompanied by easier and better access to a variety of markets and global poverty reduction data reveals that people are enjoying the fruits of their labor more than ever. The idea of neo-liberation was also aimed at allocating some of a country's powers to the international body hence international interest would prevail over national interest. Clearly, neo-liberation has been responsible for the stagnated wages and benefits, particularly in developing nations. From history, domestic and international political and economic factors directly and undoubtedly impact on trade barriers. While the benefits of globalization may not have touched all the people on the planet, it cannot be denied that these benefits are making inroads into even the most remote corners of the earth and bringing people face to face with a life they had never imagined possible. Reducing global poverty can be best achieved by globalization and as research and data shows, the process is already underway successfully. References Anderson, J.E. (2009). Globalization and Income Distribution. National Bureau of Economic Research. Retrieved August 22, 2014, from: Bird, K. (2004). A framework to analyze linkages between trade policy, poverty reduction and sustainable development. Overseas Development Institute. Binkley, S. (2006). The Perilous Freedoms of Consumption: Toward a Theory of the Conduct of Consumer Conduct. (Oct 2006). Journal for Cultural Research, vol.10 (no. 4), pp.343 – 361. Blass, W. P. (2005). Globalization’s Impact on Eastern Europe. Megatrend Review, 2(1), pp. 107-125. 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Wade, R. H., (2004). Is Globalization Reducing Poverty and Inequality?. World Development, 34(5), pp. 1-23. . Read More