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| Sunday, 4 July 2004 |
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| News Business Features Editorial
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Neo-liberalism and Washington Consensus These days frequently used two concepts in economic literature are neo-liberalism and Washington Consensus; these two refer to two different situations but are frequently used interchangeably. Neo-liberalism is a set of economic policies that have become widespread during the last 50 years or so. Neo means new. Then what is the old liberalism? The Physiocrats, a French group of economists, introduced liberal economics in Europe. A famous Scottish economist, Adam Smith, who was greatly influenced by the Physiocrats thinking, wrote a book called, Wealth of Nations in 1776 based on this liberal thinking. He and others advocated abolition of government intervention in economic matters. No restrictions on manufacturing, no barriers to commerce. Free trade is the best way for a nation's economy to develop. Such ideas are liberal in the sense of no controls. Main points of neo-liberalism include: * Cutting public expenditure for social services like healthcare and education. In other words reducing the safety net for the poor. However, they do not oppose government subsidies and tax benefits to business. * Deregulation. Reduce government regulations of everything that could diminish profits, including protecting the environment and safety on the job. * Privatisation. Sell state owned all assets and businesses to private investors. Although usually done in the name of greater efficiency, privatisation has mainly had the effect of concentrating wealth even more in few handsand making the public to pay even more for its needs. * Elimination of the concept of public good or community. Pressurising the poorest people to find solutions to lack of their health care, education and social security all by themselves. The intellectual foundation of neo-liberalism stem largely from Friedrich Hayek and Milton Friedman in the 1950s and 1960s. Milton Friedman was responding to Keynes's expansionary economic policies. Neo-liberal policies were first tried in Chile in 1970s after the bloody revolution under General Pincheot, subsequently it spread all over the Latin America in 1980s and later in 1980s and early 1990s in the whole developing world.. * The rule of the market. Liberating free enterprises or private enterprises from any bonds imposed by the government. They say that unregulated market is the best way to achieve economic growth, which will ultimately benefit all of us. It is the basis for Reaganomics or Thatherite economics. . Washington Consensus Williamson in 1990 in an article introduced a set of policy reforms that most official Washington thought would be good for Latin America. It can be summarised as: Fiscal discipline A direction of public expenditure priorities towards fields offering both high economic returns and potential to improve ,income distribution, such as primary education, primary health care and infrastructure. Tax reforms (to lower marginal rates and broaden tax base) Interest rate liberalization A competitive exchange rate Trade liberalization Liberalization of inflow of foreign direct investment. Privatisation Deregulation (to abolish barriers to entry and exit) Secure property rights. These nine items are the so called Washington Consensus. They are more or less the same as neo-liberal prescriptions but the objectives aimed to achieve are different. Philosophical under pinning for Structural Adjustment Programmers of the World Bank and the IMF was provided by this Washington Consensus. The Poverty Reduction and Growth Facility Programme (PRGF) package was also based on this philosophy. Although Williamson thought this package arose as a result of the crisis situation in Latin America, the real reason behind this introduction, according to Mark Weisbrot, was the mandate given to Reagen to tame the Asian Tigers as they were eating into the American industrial export market by their cheaper products. Regaining Sri Lanka the strategy document of the UNF government has incorporated all the ingredients of the Washington Consensus. The premise that "government must provide a conducive environment in which private sector has the freedom to make necessary decisions to continually improve productivity", which is the rationale of Regaining Sri Lanka, and the philosophy of Washington Consensus has failed in most African, Latin American and Asian countries. The main theme of the Washington Consensus was to keep the government away from economic activities so that the Trans-national Corporations could exploit the markets of the Third World. Sri Lankans have rejected this economic philosophy in April this year. UPFA government has presented a more appropriate rationale for economic development, based on state led market economy which was the rationale of South Korea when economic transformation was attempted to become a member of OECD. |
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