The Neoliberal Theory of Economic Development

Last Updated on July 3, 2023 by Karl Thompson

According to neoliberalism big government and too much official development aid prevent economic and social development, while deregulation, privatisation and lowering taxation are required to achieve economic growth.

This post outlines neoliberal strategies for development and then briefly assesses the effectiveness of neoliberal policies.

What is Neoliberalism?

While the usage of the term neoliberalism varies considerably, for the purpose of this post i use the term to refer to that set of economic policies which have become popular in economic development over the last 30 years (since the late 1980s) – namely increased privatisation, economic deregulation and lowering taxation.

Neoliberalism replaced modernisation theory as the official approach to development in the 1980s. It focuses on economic policies and institutions which are seen as holding back development because they limit the free market. The agreement by the World Bank and IMF that neoliberal policies were the best path to development is referred to as the Washington Consensus following a meeting in Washington by world leaders in 1989.

What prevents development?

Neoliberals argue that governments prevent development – When governments get too large they restrict the freedom of dynamic individuals who drive development forward.

Neoliberals argue that there is some pretty powerful evidence for this – Think of communist regimes in Eastern Europe, although these governments forced through industrialisation, they would not allow people enough freedom to bring about the kind of consumer culture (based on individual freedom of choice and expression) that emerged in Western Europe in the 1960s, so development stagnated in those countries because of governments having too much power. Similarly, neoliberals argue that even in Capitalist countries where there is too much ‘red tape’ – or too many rules, regulations, taxes, and so on, it’s harder to do business and so harder for economies to develop.

Neoliberals are also critical of the role of Western aid money. They point to the many corrupt African dictatorships which emerged in Africa in the 1960s-1980s. These were often propped up by aid money from Western governments, and during this period billions of dollars were siphoned off into the pockets of government officials in those countries and not used for development at all.

How can countries develop?

Neoliberalism insists that developing countries remove obstacles to free market capitalism and allow capitalism to generate development. The argument is that, if allowed to work freely, capitalism will generate wealth which will trickle down to everyone.

Another way of putting this is that neoliberals believe that private enterprise, or companies should take the lead in development. They believe that if governments promote a business-friendly environment that encourages companies to invest and produce, then this will lead to exports which will encourage free trade. So encouraging ‘free’ trade is a central neoliberal strategy for development.

The policies proposed are those that were first tried in Chile in the 1970s, then in Britain in the 1980s under Thatcher. They include:

• Deregulation – Removing restrictions on businesses and employers involved in world trade – In practice, this means reducing taxes on corporate profits or reducing the amount of ‘red tape’ or formal rules by which companies have to abide – for example, reducing health and safety regulations.
• Fewer protections for workers and the environment – For the former this means doing things like scrapping minimum wages, permanent contracts. This also means allowing companies the freedom to increasingly hire ‘flexible workers’ on short-term contracts.
• Privatisation – selling to private companies industries that had been owned and run by the state.
• Cutting taxes – so the state plays less of a role in the economy

Neoliberalism and Structural Adjustment Programmes

Some countries willingly adopted these policies, believing they would work; others had them imposed on them as part of Structural Adjustment Programmes (SAPs). SAPs basically involve the World Bank or IMF agreeing to a loan for a developing country (this might be to build roads, hospitals, industrialise, mechanise agriculture, build sewage systems, schools, etc.) as long as the country fulfils certain conditions. Since the 1980s, these conditions have meant such things as deregulation and privatisation.

Criticisms of Neoliberalism

1. A report from the CEPR compared the period from 1960 to 1980, when most countries had more restrictive, inward-looking economies, to the period from 1980 to 2000, the period of neoliberalism, and found that progress was greater before the 1980s on both economic and social grounds.
2. Those countries that have adopted free market policies have developed more slowly than those countries that protected their economies.
3. Dependency theorists argue that neoliberalism is merely a way to open up countries so they are more easily exploitable by transnational corporations.
4. Transnational corporations do not tend to invest in the poorest countries, only in LDCs and NICs.

Global Development Revision Notes

If you like this sort of thing, then you might like my Global Development Revision Notes –