Neo-liberal concept and its consequences

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Under fire of criticism (mostly by the civil society), which has pointed out the massive social costs of insensitive, blanket enforcement of structural adjustment programmes, the neo-liberal concept has been weakened somewhat. Its advocates have attenuated their rhetoric, and added new elements to their policies that have, to some extent, begun to reflect external costs and the broader context of development (the need for public goods, services, and collective action):

  • investment in social infrastructures and human capital (primary education and healthcare),
  • capacity building in state administration (functioning customs, tax administration, planning, management, etc.),
  • support to small-scale businesses (micro-crediting, land reforms, consultant services, marketing assistance, etc.),
  • support to civil society and free media,
  • technology transfer,
  • institutional reforms (interconnected reforms, building of basic institutions – police, anti-monopoly authorities, inspection bodies, etc.),
  • possibly more advanced efforts to cultivate social capital (co-operation, communication, social cohesion).

Is neo-liberalism profitable to multinational corporations?

It must be admitted (as Joseph Stiglitz, former World Bank chief economist, has done in his book) that the purely neo-liberal approach, based on the neo-classical economic theory, has largely enjoyed full support of the private sector, primarily among the powerful financial and business circles of Wall Street and the City of London. It has been the case to such an extent that one cannot but ask whether its callous enforcement was caused solely by the intellectual pride and ideological conviction[1] of the international financial institutions, or by political assignment by right-wing governments, who kept a tight rein on the world’s politics. The benefits from such a form of globalisation going directly to the main capital groups and multinationals are all too obvious:

  • expanded opportunities to invest (and make free with the revenues),
  • expanded room for financial speculation (liberalised capital accounts),
  • access to cheap resources (raw materials, workforce),
  • improved access to new assets (land, real estates, equipment, acquisition of entire companies),
  • market expansion (less dependence on saturated developed markets),
  • more business opportunities due to commodification (such as privatised water management, social services and healthcare),
  • increased economic power (growing horizontal and vertical concentration, growing share in the world’s GDP and international trade),
  • omission of various burdensome and hard-to-handle externalities and social and human factors makes legitimate the simplistic, economist interpretation of the world, where all problems can be transformed into clear, measurable, technological tasks (merely a question of capital, technology, and know-how),
  • increased political power and freedom (growing economic dependence and dependence on economic growth, erosion of the national state, crises of its legitimacy, effectiveness and sovereignty),
  • doors open to state officials’ and elected politicians’ offices,
  • minimal control and demands on accountability (minimal chance of regulation of large business players).

Such an interpretation of globalisation, combined with the enormous technological development, has indeed brought the large financial and economic players fabulous wealth and undreamed-of opportunities. The political elites of the North and South alike have also benefited from it, assisting this concept of globalisation to take place with their (in)activity. Purchase-effective consumers (of the upper and middle classes) have also benefited greatly on a global scale: increased choice in goods and services regarding both stock and quality, many prices pushed down by competition. Several countries have really arisen from poverty thanks to globalisation (the Asian Tigers).

The Widening of the Gap

Yet it began to become obvious in the 1990s that there was something not quite right with globalisation. Not only did the circle of countries and people simply left out by globalisation begin to grow, encompassing Africa, entire regions of South Asia, Central Asia, Latin America, and pockets of poverty and numerous already previously marginalised groups world-wide, including the wealthiest countries. What is more, the circle of people who do have access to global economics but have ever greater difficulties in keeping pace with it[2] has expanded. Above all, the middle classes in the wealthy countries have felt a strong blow by global competition: stagnating real wages, growing unemployment, relocation of factories, more ‘flexible’ labour market and reduced powers of trade unions, increased demands on qualification and flexibility, erosion of social securities and the social state. Previously relatively well-off groups have suddenly found that in spite of working the same or harder, their distance from the ‘upper crust’ is fast growing, while their distance from the lower social classes has rather diminished.

Consequences of Neo-liberal Politics

The traditionally passive attitude of the business community to global problems has thus begun to erode in consequence of the following processes:

  • poor results of neo-liberal politics, great externalities,
  • worsening situations of poor countries and groups,
  • limited results of development aid and co-operation,
  • waning trust in governments, inability or unwillingness of governments to provide public goods,
  • limited capacities of intergovernmental organisations,
  • growing polarisation within and among countries,
  • massive and ever stronger criticism of neo-liberal globalisation by developing countries and civil society (anti- and alter-globalisation movements),
  • growing consumer power (increased competition and successful consumer boycotts),
  • decreased legitimacy of the global economic system,
  • growing business and managerial risks (along with opportunities),
  • diminishing popular trust in multinational corporations,
  • birth of new concepts and alternative approaches (above all, sustainable development).

It is also worth mentioning that the neo-liberal, corporative concept of globalisation is paid for most dearly by small-scale farmers, craftspeople, and small-scale and medium businesses regardless of their nationality. The post-Fordist global economy does demand a flexible offer of a wide range of customised products (economy of scope, see Hoogvelt, 2001), creates room for the emergence of new industries and business ‘niches’, where small companies (such as programmer services) find a living; but at the same time, the economic and political position of small-scale and medium businesses grows weaker with the horizontal and vertical concentration within industries, shift of the tax burden from the large businesses to the small ones, and the move away from direct taxation to indirect. Hypermarkets, wholesale chains, construction conglomerates, and multinational automotive manufacturers now neither buy up nor eliminate directly their numerous small-scale suppliers. They take advantage of their services, but keep them on the edge of their capacities: under pressure, allowing them to just about survive. Millions of employees, as well as local communities or smaller governments, are in similar situations world-wide. The multinationals then use their size, mobility and capital strength to trigger competition among the governments to offer the best conditions, including subsidies to the corporations (so-called corporate welfare) and minimal tax burden (and tax paradises).

The Problem of Trust

There is little wonder that the trust of the planet’s population in corporations, chiefly the global ones, is lower than their trust in governments, and intergovernmental as well as non-governmental organisations. According to annual international public opinion polls, commissioned by the World Economic Forum in Davos, it is constantly falling. In fact, the trust in global corporations is at its historic minimum since the surveys started (see Chart 1).

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Chart 1. Overall changes in trust in institutions since 2001

The Connection with the Political Environment

Naturally, a feeling has begun to spread among the captains of the global economy that business as usual may soon not suffice any longer. Unreliable states, hostile consumers, deepening global problems in large portions of the planet, and undermined trust in the free market are all worlds apart from the supportive, stable, and predictable environment that all businesses need to run successfully.

However, the reason for increased activity in the area of corporate responsibility may be quite different. Global corporations have an ever increasing influence on the formation of policies both in national governments and international organisations such as the WTO. A recent study by the Europe-wide NGO network Seattle to Brussels Network reveals the extent of corporate influence on the European trade policy. The efforts to reduce corporate externalities and to produce public goods may stem from the need to even off, at least to some minimum degree, or justify their political influence. Or, to distract all attention from it.

The data from the above survey on public trust can also be interpreted in the way that the connection of political and economic powers (i.e., governments and big business) has reached such proportions in many countries that it can no longer be covered up. Many lose faith in the possibility to change things, let alone by their own means. Writing off the corporations, they lose trust in the governments as well. However, the room vacated by the national state is not filled with the civil society automatically. The social tension brought about by this gap can then veer against the corporations, provoking their intervention.

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  1. Many economists (Mishan, 1994, Henderson, 1999, Amartyrja Sen) have already pointed out that the assumptions of neo-classical economics (and still widely taught mainstream economics) are unsustainable. Such theoretical constructions as ‘effective market’, ‘general economic balance’ or ‘rational player’ on a market with perfect information may enable interesting modelling of economic processes, but have little in common inside the everyday reality of our lives; reality hardly ever lives up to such assumptions.
  2. Ankie Hoogvelt (2001) elaborates on a theory saying that globalisation has altered the conventional social classification – the three-class pyramid – to an arrangement reminiscent rather of three concentric circles. The circles, however, cut across national and regional borders. The inner circle includes about 20 per cent of the world’s population called the bankable. This global elite is then encircled by those 20 to 30 per cent of the world’s population who are thrust in uncertain forms of employment and had to fight hard for their jobs in a fierce international competition. Finally, the third and largest circle represents the roughly 3 to 4 billion people who are practically excluded from the global system. They are neither interesting as potential consumers nor as a workforce.