Global Political Economy Series: Neoliberalism and Globalisation
Foreword
It is common to hear in public discourse that the world has never been as interconnected and interdependent as it is today. Technological progress in the fields of communication and transport has promoted giant leaps in the last 100 years in terms of the internationalisation of the economy. The term globalisation, in fact, has become of common use, and national economies can no longer be studied without facing their embeddedness in the world economy. The series of articles Global Political Economy Series strives to address the complexity of the global economy by historicising the process that led to the present situation, providing an overview of the different academic approaches, and finally coming up with critical interpretations of the global economy and globalisation. The study of global political economy as a coherent subject of inquiry provides valuable insights into the big issues of our days, such as poverty, inequality, development, and sustainability. The pieces will maintain a humanities-based approach. Therefore, the economy will be seen as the intertwining between several factors like politics, society, culture, and human agency rather than the result of mathematical calculations. The set of articles will be divided into three blocks, each one composed of three articles. The first block will analyse the world economy from a historical perspective. The second one will provide an overview of the main theoretical interpretations of the world economy. The third one will address some of the main questions of today’s global political economy with the analytical tools previously provided.
Global Political Economy Series is divided as follows:
Global Political Economy Series: From the Discovery of the Americas to Imperialism
Global Political Economy Series: Decolonisation, World Capitalism and Neoimperialism
Global Political Economy Series: Neoliberalism and Globalisation
Global Political Economy Series: Liberal and Neoclassical Interpretations
Global Political Economy Series: State-centric & Developmentalist Interpretations
Global Political Economy Series: Critical Approaches and Dependency Theory
Global Political Economy Series: Why Few Have Much, and Many Have Little - Inequality
Global Political Economy Series: The Wretched of the Earth - Development and Poverty
Global Political Economy Series: The Mantra of Our Times – Sustainability
The last piece of this series introduced the decline of the Bretton-Woods arrangement and the relative global order. The system that spurred unprecedented economic growth and allowed the US to achieve a position of world hegemony entered a period of crisis in the late 1960s and started to crumble due to the collapse of the gold-dollar global convertibility (Frieden, 2012). The 1970s inaugurated a season of structural changes in the world economy, that by the 1980s would be substantially different than before (Frieden, 2012). The oil shocks of the 1970s accelerated the process of desegregation of the precedent global economic arrangement, heading decisively towards what is known today as globalisation. Unlike other historical shifts that have been illustrated in the previous articles, this one was not characterised by a change in the hegemonic position of one state, but rather by the willingness of conserving such a dominant position (Harvey, 2005). This process of reshaping, as well as the resulting economic order, has often been labelled “neoliberalism“, of which some definitions will be presented below. The first part of this article will provide a historical account of the steps that led from the Bretton-Wood system to neoliberal globalisation. The second part will delve into a critical analysis of neoliberalism, highlighting some of its implications and major features.
The crisis of the 1970s and the emergence of neoliberalism
The previous article of this series described the main features of the economic world order based upon the principles of Bretton-Woods. Stability brought by the universal gold-dollar convertibility had allowed unprecedented economic growth for industrialised countries, and several underdeveloped ones were rapidly catching up with the industrial gap (Frieden, 2012). As highlighted by Harvey (2005), by the late 1960s and early 1970s, in most industrialised countries growth rates had slowed down compared with previous trends, but the inflation which characterised the whole post-War period grew at a higher rate. Such an economic conjuncture, also known as stagflation — i. e., the combination of inflation and stagnation —, critically eroded the opportunities for profitable investment for firms. Social expenditure by the state encouraged the growth of prices, but the opportunities for capital to flow into new profitable markets were limited both by the growth of the power of the labour force efficiently demanding better conditions (Harvey, 2005) and by the progressive emancipation of the Global South that struggled for playing a central role in the world economy (Slobodian, 2018). The crisis of investment in the real-world economy, both nationally and in the form of FDI, led financial institutions to operate with renovated eagerness — financial flows were indeed very low in the post-WWII period (Frieden, 2012).
Here again, the conditions provided by one mode of global accumulation led to the growth of the following one: financial entities benefited from the stability brought by Bretton-Woods and financial capital started to flow. This nucleus of financialisation prompted speculative attacks on the main currencies in the world, including the dollar, which led the gold-dollar convertibility to collapse in 1971 (Frieden, 2012). The USA was reluctant to absorb the effects of inflationary pressures which might have been possible with the adoption of austerity measures and rather devalued the dollar, throwing the whole currency exchange system into chaos. The sudden liberalisation of the gold-dollar ratio had indeed repercussions on those currencies whose value was fixed according to the value of the dollar. Thus, the possibility of speculating in such a market, in which currencies were suddenly free to fluctuate, led to consistent financialisation of the economies, given that the real sector was stagnant (Frieden, 2012). Moreover, the steep increase in the price of oil decided in 1973 by OPEC (the cartel of oil producer countries) led to the deepening of stagnation and inflation caused by the increase in the costs of production and, consequently, in prices (Frieden 2012).
Such an economic conjuncture led to a rethinking of the world economic order, which was led by the USA and was aimed at regaining its hegemonic position that was increasingly threatened. The factors that endangered the American hegemony were both the growth of the Global South as a decisive actor in the global order and the rigidness of the Bretton-Woods system, incapable of governing growing financial flows. The USA, which was no longer capable of occupying the position of monolithic world hegemon, fostered a system of supranational governance, known as the Washington Consensus, aimed at promoting the interests of transnational capital — a consistent share of which was based in the US (Harvey, 2005). During and after the 1970s a consistent number of international organisations emerged, all of them aimed at promoting the internationalisation of the economies and spurring the concept of economic globalisation (Frieden, 2012). Examples of those are the EU, the NAFTA, the IMF and WB — whose role of supervision of the global economy was consistently enhanced in the years of neoliberalism — and the WTO.
Structural adjustment
Not only did the shift that occurred in the 1970s change the economic rationale underpinning the developed countries’ economic policies, but it also managed to undermine the growing sentiment of empowerment of the Global South, thus resolving the incumbent problem of restricted markets that the economic independence and the independent industrialisation of those countries entailed. A paradigmatic case of how transnational economic governance managed to reshape the world economy is the Latin American one, and a very similar trajectory was followed by African states during the so-called African debt crisis. Latin America was characterised in the 1970s by relative independence vis-à-vis the US and the world market (Bértola & Ocampo, 2012). Even though the US had traditionally been very influential in the area, numerous Latin American countries were engaging in import substitution programs, meaning that they intended to develop an internal market and spur economic growth from within (Bértola & Ocampo, 2012). The US had been seeing such an inclination as a threat to their national interest — as proved by the military interventions they underwent which are analysed in the previous article. Nonetheless, the influence of the Economic Commission for Latin America and the Caribbean (ECLAC) and the propagation of Prebisch’s (1962) views promoting inward-looking development countered the neo-imperialistic attitude of the US. Inward-looking development, however, relied heavily on state expenditure and countries of the region were highly indebted, mostly to US banks. In 1979, the deliberate and steep overnight increase of the interest rates, known as the Volcker shock, operated by the Federal Reserve made the debt of Latin American countries impossible to be served (Bértola & Ocampo, 2012).
The first country to declare the default of its sovereign debt was Mexico in 1982. The creditors, mainly US banks, refused to accept the default and formed a cartel, threatening the country of not being able to access credit ever again: rather, they offered the restructuration of the debt throughout the IMF, which was at the time a US-led institution and had its headquarters in Washington D.C. (Bértola & Ocampo, 2012). Mexico accepted the credit line of the IMF, which was bound to a program of structural reforms of the Mexican economy, formally aimed at ensuring fiscal discipline, but that served as a picklock to open the Mexican economy to the world market and to FDI of multinational corporations (Harvey, 2005). According to Harvey (2005), this is when the concept of structural adjustment was invented, meaning the restructuring of national economies with the objective of inserting them into the world market and bending them to the principles promoted by the Washington Consensus. The structural adjustment had both the capacity of open economies that had been reluctant to compete on the world market, and making those countries reliant on foreign capital flows, and thus weak and exposed to the fluctuations of the international financial markets (Bértola & Ocampo, 2012).
In the African context, the most renowned case of structural adjustment is that of Ghana. The country raised high expectations after its independence from the UK in 1957. Like many other countries in the region, Ghana adopted a model of development oriented towards inward-looking industrialisation, highly influenced by other countries in of third world (Odutayo, 2015). The costs of such a model led the country towards contracting debt with financial institutions mostly based in western countries. The debt became unsustainable during the 1970s, and in 1983 Ghana was obliged to adopt programs of structural adjustment to avoid default on its debt (Odutayo, 2015). With a mechanism that closely resembles the one put in place in Latin America, Ghana’s economy was forcefully opened to the world market, relegating it to the role of commodity exporter and importer of industrial goods from developed countries (Odutayo, 2015).
Therefore, the world economy underwent a decisive change that started in the 1970s and responded to the need of dealing with stagflation. The Bretton-Woods system had shown its limits in governing the world economy and had to deal with some structural contradictions (Harvey, 2014). The widespread stability and relative equality promoted by Bretton-Woods in the developed countries, with the strong participation of the state curbing the edges of the capitalist economy, clashed with the need for capital to constantly expand in new markets, and thus paved the way for neoliberal globalisation. However, what neoliberalism and neoliberal globalisation really are might not be completely clear: therefore, the next section will address those two concepts.
Neoliberalism and neoliberal globalisation
The emergence of neoliberalism can be both considered as continuity and as a significant change in the world economy. On the one hand, as explained above, it consistently changed the way in which the world economy was organised, proposing a new world order. On the other, it did represent the continuity of capitalist economy and its continuous adaptation. Fine and Saad Filho (2017), in fact, argued that neoliberalism is a new step in the development of capitalism, which entails a new, and yet not unproblematic, world governance. Even though the shift that occurred in the 1970s can be seen from a liberal point of view as a necessary adaptation of capitalism to the problematics it had created itself, and thus a step towards economic advancement worldwide (McCloskey, 2007), many scholars have highlighted its critical aspects. Furthermore, it constituted the affirmation of freedom — understood as economic freedom — of individuals to determine their own faith through their actions in the framework of an unconstrained market (Slobodian, 2018).
David Harvey (2005) traced back the emergence of neoliberalism to the willingness of capital to regain power vis à vis labour. In fact, the share of global income of the world’s richest 1% considerably grew during and after the implementation of the neoliberal global arrangement, as well as productivity of labour, whereas the income of the middle and working classes stagnated (Milanovic, 2016). The labour force had been gaining considerable power in most industrialised countries, and economic industrialisation, financialisation, and competition were the tools through which the entrepreneurial class weakened the labour movement and increased the margins of profitability (Harvey, 2005). The neoliberal offensive of capital against labour is exemplified by the policies of Thatcher’s government — elected in 1979 — in the UK, aimed at deindustrialising crucial sectors that were no longer productive and firmly countering the reaction of trade unions. Such an offensive was indeed led by the US — Ronald Regan, another figure known for the propagation of neoliberal policies, was elected in 1981. In fact, the US in this period had the role of the hegemonic power of world capitalism — which was still fighting against the socialist block — and it was home to most of the entrepreneurial class whose interests were being threatened (2005).
Neoliberal globalisation — the tendency toward the internationalisation of the market to enhance competition — was promoted according to Slobodian (2018) with the deliberate intention of both freeing the markets from the state’s interference, but also of protecting them from democratic control which operated primarily at the national level and which was partially ensured before the 1970s. Rather than promoting market freedom, neoliberalism postulated the protection of the free market by its internationalisation and hence subtracting it from national political control. The state is often believed to have relinquished the role of regulator, leaving the market governing the course of the economy by itself, and even everyday life (Harvey, 2005). As Harvey famously put it, this process represented the economisation of social life (2005, p. 53). However, the state, rather than vanishing, seems to have shifted its way of acting, conserving a decisive role in the economy. Rather than promoting the embeddedness of the market in society (Polanyi, 1994), it acts as a facilitator of the free market, and instead of curbing its edges, it inhibits its detractors (Genschel & Seelkopf, 2015).
As suggested by Slobodian (2018), the advancement of neoliberalism did result in a new world order governed by the free market and under the supervision of international governance of several institutions. Their function is that of promoting and protecting the free market. In this sense, the EU is paradigmatic for it is essentially built upon the concept of the free market: the latter is indeed the very core of European integration, as suggested in the treaty of Maastricht (Bieler, 2005).
In such a world order, which can appear to be chaotic and decentralised, the US maintained a position of hegemony. The institutions that guarantee the functioning of the global market are highly influenced by the US — as mentioned above, the IMF is essentially US-led and US-based. The US managed to achieve a position from which it is able to propagate widespread consensus among its allies, hence a hegemonic position in the strict Gramscian sense, where consensus is not imposed by the use of force but blessed by the consent of those in a subaltern position (Morton, 2007). Furthermore, the institution of a global market highly favoured those countries that were already developed — first of all, the USA, which was the most economically developed country — and industrialised, providing opportunities for progress to some countries — i.e., South Korea and partially China — but also condemning others to underdevelopment caused by the lack of competitive sectors (Varoufakis, 2015). The transformation of the world economy from the Bretton-Woods agreement to neoliberalism is thus quite evident (Frieden, 2012), and the world economy after the 1970s very much resembled the early 20th-century economic conjecture led by Great Britain which went under the name of “liberalism“ — hence the name “neoliberalism“ — for both were based on the principle of unconstrained free market. However, neoliberal globalisation is a much more complex and elaborated system of transnational governance which provides the US with a stable hegemonic position perpetrated mainly through soft power — as opposed to the UK, which fueled the free market with imperialism and militarism (Frieden, 2012).
The opening to international competition of most of the world economies also put in danger the hegemony of the USA. Those economies that in the neoliberal framework achieved to grow partially outside of the sphere of influence of the USA, like Russia and China, have lately begun to challenge the hegemonic position of the US. As argued by Arrighi (1994), the consistent flows of capital from the US to China may be the symptoms of a slow shift in the world hegemony — as much as it was the case of the financial flows from The Netherlands to Great Britain and from Great Britain to the USA. The world in the 21st century is certainly witnessing some of the most problematic aspects of neoliberalism and neoliberal globalisation. This suggests that major changes in the world economy might occur, as the contradictions of such a system are emerging (Harvey, 2014) and it is still uncertain how they will be governed.
Conclusion
The world economic arrangement based upon the Bretton-Woods treaty had to face some major problems connected both with structural elements of the system itself and external factors. The USA, the hegemonic power after WWII, understood that it was no longer possible to maintain the rigid post-war arrangement as the pressures coming both from financial speculation and capital that was losing profitability threatened their internal economy. Thus, from the early 1970s, programs of widespread liberalisation of the markets under the principles of the global market, financialisation, and competition were put in place in most developed countries. Such an arrangement was then propagated, under the aegis of the US, through the debt mechanism and structural adjustment to a vast number of developing countries, of which Latin America is a major example. The new economic order has often been labelled “neoliberalism“ or “neoliberal globalisation“. Neoliberalism has often been interpreted critically. Despite the liberal interpretation that pictures it as a natural consequence of the economic conjecture of the 1960s, scholars have highlighted its problematic aspects. Some scholars have identified neoliberalism as the offensive of capital against labour to regain profitability. Others have highlighted the capacity of neoliberalism to protect the markets from the democratic effects of political control over them and its capacity of transforming state action.
The US neoliberal hegemony has recently shown some weaknesses, and new powers are challenging such a world order. Neoliberalism does present some contradictions that have not been governed yet. The next three articles of this series will address Global Political Economy from the three main perspectives in academia. This will provide the reader with a clear picture of different approaches that have been put in place both practically and theoretically and will allow for a better comprehension of real-world cases that will be analysed in the last three articles.
Bibliographical References
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A very interesting article on neoliberalism and globalisation. I especially appreciated the clear way you are analysing the topics in this series; although they are very complex, you managed to write a very understandable and effective article. Good job!
Excellent and interesting article! You explained the dynamics of interest clearly and effectively, and you adequately supported your arguments with both theoretical underpinnings and empirical examples. I would definitely recommend this text.