Local economic development, an emerging reality in sub saharan africa

CHAPTER 4: THEORETICAL AND CONCEPTUAL CHAPTER

This chapter will comprise of the neo-liberal theory, the empowerment theory, the theory on decentralization of government and the concept of good governance.

4.1: The Neo-Liberal Theory

Neo-liberalism is used to demonstrate the ideology which underpins the basic philosophy in the global market structure as an enabling tool for economic growth, thus leading to poverty alleviation. This theory is predicated on the fact that widespread involvement of the state in economic activities was leading to inefficiency and slower rates of economic growth than would have been achieved if the markets were left on their own devices. The principle of transnationalization in trade has been upheld by neo-liberal theorists and policy advocacy. It argues that liberalization of markets is the key to development policy reform and will lead to the maximization of the gains from international trade for the good of all (Colclough, C. and Manor, J. 1991, p. 51). The liberal school of economics became famous in Europe as an engine of development when Adam Smith (classical economist), in 1776 published his book “The Wealth of Nations”. Adam Smith suggested that, for maximum efficiency, all forms of government interventions in economic activities should be removed and free trade was the best way for a nation’s economy to develop through the invisible hand of the market (Anup, July 02, 2007 and Willis, 2005: p. 47).
The capitalist crisis over the last 25 years, with its shrinking profit rates, inspired the business class to revive economic liberalism. Now, with the rapid globalization of the capitalist economy, we are seeing neo-liberalism on a global scale (Elizabeth and Arnoldo February 26^th, 2000).

4.1.1: Definition of Neo-liberalism and the Theory

Neo-liberalism in its dominant international use refers to a political-economic philosophy that rejects government intervention in the domestic economy. It is a label for an economic and political movement based on liberalization. It focuses on free market policy with fewer restrictions on business operations, and property rights (Answers.com, 2006).

Neo-liberalism has been promoted through the main international financial institutions and organizations of the world, namely the IMF, WB and World Trade Organization (WTO), and by powerful states such as the United States of America and European Union member states. Multinational and transnational corporations also foster the neo-liberal philosophy because it is compatible with their objectives in the current global dispensation. As such, these governmental institutions are seen as advocates of neo-liberalism. They point to economic studies of the turbulence and shocks of the 1970s and argue that free markets will be more resilient in the face of such shocks, produce higher growth, better returns on capital and therefore more investment and development. They argue that binding other nations (less developed) to the developed core (developed) will promote global stability, prosperity, and eventually a turn to more democratic forms of government (Answers.com, 2006 and Willis, 2005: p. 47).

The ideology of neo-liberalism is centred upon the values of unregulated trade and markets, and the expanded business prospects provided by globalization. It argues that free markets, free trade, and the unrestricted flow of capital will produce the greatest social, political and economic good for everybody in the society. It advocates for minimal government spending, minimal taxation, minimal regulations, and minimal direct involvement of government in the economy. The argument is that market forces will naturally fill many areas of jurisdiction for the highest overall gain. Neo-liberalists argue that the Welfare State should be dismantled or privatized. The thrust of this argument is to utilize the world’s resources in the most efficient way possible, and in doing so, to make more markets open to developed nations (Ibid, 2006,). Market solutions to the problem of resource allocation are inherently natural and the emerging hegemony of the market stands out as the essence of development. The liberal political economy is that of a borderless world as far as economic activities are concerned. In other words, neo-liberalism favours the opening of foreign markets (globalization) through its free trade policy and international division of labour (Hettne, Bjorn, 1995, pp6-8).
Neo-liberalism favours privatization over direct government intervention in the production process, it opposes socialism, protectionism and measures success in overall economic gain. Neo-liberalism has become increasingly important in international economic policy discussions from the 1970’s onwards. A major axiom of the neo-liberal school is that “there is no alternative” to globalized capitalism (Answers.com, 2006 and Willis, 2005: p. 48-49). As such in the neo-liberal universe, co-operation is emphasized instead of war making. Accord is achieved by putting emphasis on individualism and the opening up of international markets through trade, deregulation and privatization. Neo-liberalism covers theories of transnationalism that claim states are no longer the dominant actors in world politics and argue amongst other things de-emphasizing the role of the state (Schmidt, J.D. 2004, p. 11). The main elements of neo-liberalism include:

-The role of the market in liberating private enterprises from any bonds imposed by the government to allow freedom of capital, goods and services and de-unionizing labour force. In a self-regulated market system allows the “trickle down” notion of wealth distribution is applicable. An unregulated market in international trade and investment is the best way to increase economic growth, which will ultimately benefit everyone in society thus leading to poverty alleviation.

-Cutting public expenditure on social services like education and health care will reduce government’s expenditure.

-Deregulation of the market to allow the forces of demand and supply as a self-regulatory mechanism.

-Privatization of state-owned enterprises to private investors for greater efficiency. This includes key industries, railroads, electricity, schools, hospitals and even fresh water.

-Eliminating the concept of public goods (community goods) and replacing it with individualism and individual responsibility (Martinez and Garcia, February 26^th, 2000).

As described by Berkeley (economic historian) and Professor Brad DeLong neo-liberalism has two main tenets:

"The first is that close economic contact between the industrial core [of the capitalist world economy] and the developing periphery is the best way to accelerate the transfer of technology which is the sine qua non for making poor economies rich. Hence all barriers to international trade should be eliminated as fast as possible. The second is that governments in general lack the capacity to run large industrial and commercial enterprises. Hence, [except] for core missions of income distribution, public-good infrastructure, administration of justice, and a few others, governments should shrink and privatize." (Answers.com, 2006).
These two principles represent parts of the “trickle-down theory,” i.e. under free-market capitalism economic growth and technological change benefit the poorest countries and people, even if ownership remains predominantly with the wealthier countries. More economic growth, specialization and opportunities create chances for individuals to achieve more and prosper, instead of rigid structures which provide only illusory protection, breed poverty and administrative bureaucracy which undermine economic transactions (Answers.com, 2006).
The neo-liberal doctrine is linked to the Washington consensus, a set of specific policy goals designed for Latin American countries and other third world countries. Neo-liberals believe that greater economic and political interdependence will lead to progress, overcome poverty and a reduction of international tensions.

4.1.2: The Washington Consensus

The Washington consensus is generally regarded as a summary of the lowest common denominator of policy advice to the Bretton Wood institutions and the subsequent use of the term to denote the neo-liberal or market fundamentalist policy. It depicts the basic framework in which the neo-liberal theory is implemented through the ten propositions outlined in the consensus: Fiscal discipline, a reduction of public expenditure, tax reform, interest rate liberalization, a competitive exchange rate, trade liberalization, privatization, deregulation and secure property rights (Williamson, August 2000: p. 251-253).
Globalization can explain the failure of the Washington Consensus or neo-liberalism by stressing on the adequacy of its main premise in that economic and social trends in a country were explained in terms of exclusive government failure rather than power relations in the larger global political economy. This explanation may seem appropriate to South Africa because of the distortions caused in a bid to enforce apartheid when most of the people were against. Government failure is the direct cause of poverty, rather than failure of the neo-liberal policy which is intended to provide a vibrant private sector and stimulate economic growth (Atkinson, 2005: p. 42). The rationale of the neo-liberal theory is that it upholds a trickle down concept – for wealth to trickle down from the rich to the poor within the economy.

4.1.3: Criticism of the Neo-Liberal Theory

Critics of neo-liberalism in both theory and practice are numerous. Karl Polanyi succinctly outlined an influential rebuttal of the neo-liberal protestation against state intervention in his book “The Great Transformation”. Polanyi contends that, modern markets require extensive political and legislative intervention. “Free markets could never have come into being merely by allowing things to take their course…laissez-fair itself was enforced by the state…” Not only was the state necessary to establish a laissez faire free market system, the self-regulating market system required continuous interference and monitoring by the state. This is because society needs to be protected against the dangers inbuilt in a self-regulating market system. It is an untenable assumption for the neo-liberals to think of “rolling back the state” instead of increasing intrusion and regulation by the central state. The consequences of an unregulated market may lead to social destruction or even war. To Polanyi, an extended market requires support of a unified currency and integrated banking system, which can only be supported by state apparatus. He stressed on the unavoidable connection between markets and social relations. He states that, it is an unobtainable dream to talk of an entirely free market system, which is void of social relations (Hodgson, 2001: p.1218-1221). This could be seen in the case of South Africa where neo-liberalism as a free market theory cannot on its own devices be able to write-off the inequality or deep rooted poverty left behind by apartheid. Allowing the free market to operate on its own devices will enable the minorities benefit enormously from inequities created by apartheid thus creating a situation where the rich will be richer and the poor poorer.
Other critics contend that developing nations whose assets foreigners have acquired and whose underdeveloped domestic political and economic institutions had been undermined by the effects of being exposed to foreign trade and rapid flows of capital see their economies being taken over. Even within the neo-liberal movement, there is intense criticism on how many developed nations have demanded that other nations should liberalize their markets for manufactured goods, while at the same time protecting their own domestic markets (Answers.com, 2006). The government in SA should protect small and medium size enterprises who create employment and generate revenue for municipalities yet are unable to compete with multinational corporations that have huge capital and technology and are globally competitive thus capable of overcoming international market complexity.
Joseph Stiglitz has described the impact of liberalized capital markets in third world as “sending small boats into the rough sea. Even if the boats are sound and the captains competent, they are likely to be capsized by the big wave”. The neo-liberal economic policy demanded boats set forth “into the roughest part of the sea before they are sea worthy, with untrained captains and crews, and without life vests” for the disappointing, if not disastrous results of neo-liberal policy advice being followed by developing nations. In effect, the neo-liberal advocates are guilty of forcing neo-liberal policy goals on countries at a time when it was not appropriate (Tabb, 2004: p. 24).
Critics say neo-liberalism impedes democratic rules. Neo-liberalism is often used as pejorative, usually not to mean an economic theory, but the implementation of global capitalism and the power of multinational corporations, as well as the effects of free trade on wages and social structures. Anti-capitalists, argue that unbridled market forces inevitably increase inequality in wealth and hence power. The effects of neo-liberalism can be seen as the rich get richer and the poor get poorer in SA. It is responsible for dismantling welfare programmes, attacking the rights of labour and cutting back social programmes. The beneficiaries of neo-liberalism are a minority while to a majority it brings more suffering (Martinez and Garcia, February 26^th, 2000).
Neo-liberalism is portrayed as the imposition of free markets from top-down arguing that it has been promoted through the largest international institutions of the world-economy namely: the IMF, WB and WTO, for the benefit of multinational corporations and core states such as, the United States and European Union (EU) member states. Many identify these policies with exploitation by corporations and the developed nations of the less developed e.g. SA. Critics argue that these institutions do not promote development, but instead ensure the advantages to developed countries that dominate them. Neo-liberal policies give multinational corporations economic power over democratically elected governments as these corporations can use their abilities to withdraw or infuse capital (and therefore affect jobs and the economy) as political leverage (Answers.com, 2006).
Anti-globalization advocates are the most vocal opponents of neo-liberalism, particularly its implementation of “free capital flows” but not free labour flows. They argue that this encourages a “race to the bottom” as capital flows to the lowest environmental and labour standards and can create moral hazard (Martinez and Garcia, February 26^th, 2000).
Although the Washington consensus provided the foundation to well functioning markets, it is incomplete and sometimes even misleading in most third world economies such as SA. Williamson clearly acknowledged the fact that the Washington Consensus in enforcing the market fundamentalist policies could not have been expected to provide an effective framework in combating poverty but that the original advice will be broadly valid. When public investment in human capital and transfer of technology is insufficient the market will not be able to fill the gap (Willianson, August 2000: p. 251 – 253).