Neoliberal policies refer to policies and initiatives which are aimed at boosting the economic freedom of individuals and limiting government intervention or interference in the economy. The specifics of these policies may vary based on the peculiarities of the country that implements them, however, they generally include policies geared at the creation of free trade zones, privatization of national assets, decrease in tax rates, and disbandment of trade unions. Before we discuss further on these policies, let us define neoliberalism.
What is neoliberalism?
The word, neoliberalism refers to a political and economic policy model which supports economic freedom for individuals and the reduction of government spending and interference in the economy. These often result in free trade, globalization, deregulation, and privatization.
Neoliberalism favors the growth of private enterprises and seeks to transfer the control of economic factors from the public sector (government) to the private sector (individuals). This is based on the belief that individuals are better managers of the economy due to self-interest which bolsters entrepreneurship, innovation, and consequently economic growth. Neoliberalism advocates for the creation of free markets, the elimination of social services, and regressive taxation.
See also: Fiscal Policies Tools and Examples
What are neoliberal policies?
Neoliberal policies are a set of economic and political policies characterized by a commitment to free market principles, such as limited government intervention, deregulation, and open trade. These policies were first developed in the mid-20th century and have been adopted by many countries, especially since the 1980s.
Neoliberal policies often result in privatizing public goods and services, reducing social welfare programs, and lowering taxes on businesses and the wealthy. The overall aim of these policies is to increase economic efficiency and growth while limiting government spending, government regulation, and public ownership.
Neoliberal policies are often associated with the leadership of the prime minister of the United Kingdom from 1979 to 1990, Margaret Thatcher, and the president of the United States from 1981 to 1989, Ronald Reagan. These two have spearheaded the implementation of neoliberal policies during their time in office. Some of the policies include the disempowerment of trade unions, privatization of national industries, tax and exchange rate reforms, and dismantling of governmental provision of housing, and other social welfare programs.
In recent times, neoliberal policies have focused on emphasizing the value of free market competition, fiscal austerity, deregulation, free trade, privatization, and a reduction in government spending especially as regards social welfare programs. These have resulted in greater income inequality and an overall reduction in social welfare.
See also: Socialist Economy Features
What are the 3 main policies of neoliberalism?
The 3 main policies of neoliberalism are deregulation, privatization, and fiscal austerity. Deregulation refers to the reduction of government regulations and controls on businesses and markets. Privatization involves the transfer of ownership and control of goods and services from the government to the private sector. Fiscal austerity refers to the reduction of taxation and government spending, especially on social services and welfare programs.
See also: What is a Mixed Economy?
Neoliberal policies examples
- Privatization of national industries
- Deregulating the capital market
- Fiscal austerity
- Eliminating price controls
- Creation of free trade zones and free markets
- Individual freedom
Privatization of national industries
Privatization is one of the key examples of neoliberal policies. It involves transferring ownership and control of public goods and services from the government to private individuals or corporations. This is often done through the sale of state-owned assets, such as utilities, transportation systems, and natural resources, to private entities. Governments worldwide are often criticized for the lack of effective service delivery and personnel inability to effectively meet the needs of the public mostly due to poor public relations and a lack of proper accountability. Privatization is thus considered a beneficial option for both the government and the people.
Governments have used the privatization of national assets as a means of driving economic reforms as it allows for an improvement in the sector as well as improving the government’s fiscal position. A notable example of the privatization of national assets where noted in the United Kingdom when Margaret Thatcher was prime minister. She was an ardent advocate of neoliberal policies. Some companies that got privatized include Britoil, British Telecom, British Petroleum, British Aerospace, British Gas, and British Steel Corporation.
In the United States, some aspects of the economy that have been privatized include telecommunications, energy, and air traffic control. Outsourcing has however been more common than privatization. Outsourcing involves the contracting of management and operations to a private provider. Some aspects of the U.S. assets management and operations that are outsourced include social welfare programs, prisons, medicare, public schools, space travel, and water supply.
The impact of privatization as an example of a neoliberal policy is a subject of intense debate among those who support it and others who are opposed to it. Critics of privatization argue that it can lead to monopolistic practices and reduced access to essential services for disadvantaged communities. They also argue that privatization can lead to job losses and a reduction in the bargaining power of workers, as private companies may be less likely to offer union protections and benefits. Additionally, it can also result in higher prices for consumers and decreased quality of services, as private companies prioritize profits over public welfare.
Neoliberals argue that the privatization of industries, firms, and other service-providing outfits increases the efficiency of production and leads to more variety in the products and services available due mainly to competition among the producers. These usually lead to lower costs of products and services as well as improved consumer service since better consumer service generally leads to more customer retention.
Deregulating capital market
An important neoliberal policy example is the deregulation of the capital market. Capital market deregulation refers to the reduction or complete elimination of government regulations on the financial markets and institutions that deal with the buying and selling of securities such as stocks, bonds, and other security derivatives such as stock options. The goal of capital market deregulation is to increase competition and efficiency in the financial sector by allowing market participants to make their own decisions about investment strategies, products, and pricing. This often involves removing barriers to entry for new firms and reducing the role of government agencies in overseeing financial markets.
Thus, for example, if a complete elimination of government regulation were to occur in the financial security market of the United States, it may mean that companies will not have to meet any requirements before getting listed on the stock exchange, neither will transactions on the market be monitored and guided by the rules and regulations that have been set up by the Securities and Exchange Commission (SEC). Additionally, new firms wishing to operate in the financial sector will be free to begin their business without any restraints.
According to the World Bank, financial deregulation in recent years has vastly increased the ability of the financial markets to allocate international capital efficiently and has also sparked explosive growth in financial transactions. These have resulted in a restructured, more competitive, and less costly financial services industry. They also noted that the deregulation has proceeded so rapidly that the volume of purely financial transactions now greatly exceeds that of transactions driven by international trade in goods and services.
Deregulation often occurs due to the implementation of neoliberal policies that are aimed at making changes in laws and regulations or the actions of government agencies responsible for enforcing those laws and regulations. In practice, capital market deregulation may involve reducing or eliminating restrictions on the activities of financial institutions, reducing government oversight of financial markets, and reducing government intervention in financial markets even during times of crisis.
Although there has been some extent of deregulation in most capital markets which has led to the globalization of the capital market and increased ease of access to financial security instruments; this globalization has also meant that financial markets now run around the clock and respond to change so rapidly that there is a growing danger of chain reactions that could precipitate global market failure. This new pattern has led to growing economic uncertainty and instability.
Hence while neoliberal policies continue to support the move toward the deregulation of the capital market, economists argue that the deregulation of the capital market will result in complex and far-reaching negative effects if it is not effectively managed. Hence, they call on regulators in the major trading nations to address the possibility of a full-scale breakdown of the financial system due to deregulation. Neoliberals do not however agree with this position due to the diverse benefits that deregulation has brought to the economy.
Fiscal austerity is highly supported by neoliberal policies. This is because fiscal austerity prioritizes reducing the role of government in the economy and promoting market-oriented solutions. It generally involves neoliberal economic policies that emphasize reducing government spending, usually in the form of cuts to social welfare programs, in order to reduce budget deficits and control public debt. Fiscal austerity measures are often implemented as part of a broader neoliberal policy agenda, with the goal of reducing the size of government and increasing the role of the private sector in the economy. When this is done, it often leads to a reduction in social welfare programs and public services.
Critics of this neoliberal policy example argue that the reduction of social welfare programs and public services is the bedrock for the exacerbation of the challenges faced by vulnerable members of society who benefit the most from these programs and services. They also argue that it leads to an increase in the cost of assessing public services since the prior subsidies by the government to key sectors such as healthcare, transportation, and utilities usually get removed by fiscal austerity measures.
However, proponents of fiscal austerity argue that this neoliberal policy promotes the fiscal discipline of the government, enhances economic growth, and increases the overall efficiency of the government. Furthermore, the fiscal austerity measures advocated for by neoliberal policies are usually a combination of decreased government spending as well as a decrease in taxation. The decrease in taxation is part of the neoliberal support of individual economic freedom.
Eliminating price controls
One of the examples of neoliberal policies is the support for the elimination of price controls. This means that instead of the government intervening in the market to set or regulate the prices of goods and services as is obtainable in a controlled economy. In that setup, the government usually sets price ceilings or price floors for goods and services. Price ceilings refer to maximum prices while price floors refer to or minimum prices. This is generally aimed at making the prices of goods and services more affordable or preventing price gouging.
Neoliberal policies, however, ensure that the prices of goods and services are determined by market forces of supply and demand as is obtainable in a liberal economy, with minimal government intervention. This is because neoliberals believe that government intervention through pricing can result in market distortions and unintended consequences such as the exit of certain producers from the market. For example, setting maximum prices can result in reduced supply and shortages of goods of high-end goods such as precious stones and luxury services such as yacht sailings. Setting minimum prices can result in reduced incentives for businesses to produce and sell goods since the aim of most businesses is to minimize costs while maximizing profits.
Another way through which neoliberal policies support the elimination of price controls is through deregulation as it permits companies to run their businesses however they prefer. This usually means that instead of spending on legal fees and adhering to a certain maximum hours of daily operations, companies will have more capital and more time for research and development which will ultimately translate to better products and services. Additionally, deregulation reduces barriers to entry hence new companies emerge as it becomes less expensive to enter markets.
With the proliferation of more producers and efficiency in production encouraged by neoliberal policies, the prices of goods and services as determined by market forces become more stable and cheaper. Making goods and services more readily available to the populace. This in turn spurs economic growth and stability. In general, neoliberal policies are more supportive of market-oriented solutions, including the use of market prices, and view price controls as a less efficient and less effective way to address economic problems. However, some proponents of price controls argue that they can be necessary for certain circumstances to ensure basic needs such as food, shelter, education, and housing, are met and to protect consumers from exploitation.
Creation of free trade zones and free markets
One of the biggest outcomes of the implementation of neoliberal policies is the creation of free trade zones (FTZs) and free markets. Free trade zones are designed to promote economic growth and expansion of international trade and investments by reducing barriers to trade, such as tariffs, quotas, and other taxes, and providing incentives for companies and investors to set up operations and invest within the zone. They are often located at key ports. According to the Organisation for Economic Co-operation and Development (OECD), there are more than 3,500 free trade zones in 130 countries in North and South America, the Asia-Pacific region, Europe and Africa.
Free trade zones often create a more favorable business environment that attracts foreign investment and companies. The availability of funds from these investors serves as a ready source of capital for companies that exist within the zones. Additionally, the presence of these companies as well as the emergence of new one creates more jobs, increases production, and stimulates more economic activities.
While neoliberal policies geared towards the creation of free trade zones are concerned mainly with the ease of international trade between countries, free markets are chiefly concerned with the ease of economic activities within a country. As has been observed in countries that have the free enterprise system in place, there are certain advantages that a free market brings this includes:
- The encouragement of businesses to find the most efficient ways of producing and selling goods and services, which can result in lower prices and higher quality products for consumers.
- The existence of competition drives companies to constantly improve and innovate in order to gain a competitive advantage.
- Improved allocation of resources in the production of goods and services.
- Increased economic growth through fostering an environment that supports entrepreneurship, risk-taking, and investment.
The benefits of adopting neoliberal policies that support the creation of free trade zones and free markets are enormous and can bring about a lot of positive impacts on the economy of the countries that are part of the free trade zone or have a free market economy in play.
Another major example of neoliberal policy is the protection of private property, and intellectual property, and the strengthening of contractual obligations. The reduction of government regulation and control over the economy, allows individuals to make their own choices in the marketplace. For instance, it was due to the implementation of neoliberal policies that individuals were able to own property in the United Kingdom during the time of Margaret Thatcher as prime minister.
The promotion of competition through the creation of free trade zones and free markets leads to the elimination of barriers to trade and business. These in turn provide individuals with a wider range of choices and opportunities when it comes to where or who to work for, investment options, diversity of products and services, and overall control over their own lives. Additionally, the privatization of healthcare, education, transportation, and other services gives individuals the liberty to choose which private companies they use for any of those services. Similarly, deregulation can increase competition in industries such as telecommunications and energy, giving individuals more options for providers and lowering prices.
Critics, however, argue that neoliberal policies can limit individual freedom instead of increasing it. This is due to the possibility of the emergence of income inequality and decreased economic security for some individuals. Thus, they propose the active involvement of government and trade unions to curtail it. Neoliberals, on the other hand, argue that in the natural settings of a market, the presence of inequality in income is bound to arise based on individual efficiency and productivity.
What is the impact of neoliberal policies?
The impact of neoliberal policies has been both positive and negative. The creation of free markets, protection of private property rights, and encouragement of private enterprise are the positive impacts of the policy. On the negative side, the limited presence of the government in the market aids the proliferation of illegal businesses as well as the tendency of consumer exploitation in the bid to make profits.
The increasing number of entrepreneurs, the creation of newer and better-improved products and services to meet the specific needs of consumers as well as the ease with which products and services could be purchased across the globe due to the globalization and opening up of the world market space have all been attributed to the positive impact of neoliberal policies on the economy of the world. Other positive impacts include:
- Reduction of government regulations and controls on businesses and markets
- Reduction of government spending and taxation.
- The emphasis on low inflation, monetary discipline, and the independence of central banks leads to monetary stability.
- Protection of private property, including intellectual property, and the strengthening of contractual obligations.
All these combined increase economic efficiency and promote economic growth.
2007 to 2009 financial crisis is one of the major negatives that has been attributed to neoliberal policies. The crisis was caused by a combination of factors, including the proliferation of risky mortgage lending practices, inadequate regulation, and the growing interconnectivity of global financial markets. Some argue that the push towards neoliberal policies, which emphasized market liberalization, deregulation, and globalization, played a key role in creating the conditions for the crisis.
By removing restrictions on financial institutions and allowing them to engage in speculative practices, these policies contributed to the build-up of financial instability and the creation of asset bubbles. Additionally, the global economic imbalances created by neoliberal trade policies and the increasing financialization of economies also contributed to the crisis.
Neoliberal policies, therefore, have both positive and negative impacts on the economy and society. Whether the impact will be positive or negative generally depends on the specific policies, the state of the economy, and the degree of implementation.