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Neoliberalism

Neoliberalism. Introduction – Rise of Neoliberalism Neoliberal tradition Neoliberal diagnosis Neoliberal prescription Fiscal austerity Privatization Trade liberalization, currency devaluation, abolition of marketing boards Retrenchment and deregulation Conclusion. Neoliberal tradition.

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Neoliberalism

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  1. Neoliberalism • Introduction – Rise of Neoliberalism • Neoliberal tradition • Neoliberal diagnosis • Neoliberal prescription • Fiscal austerity • Privatization • Trade liberalization, currency devaluation, abolition of marketing boards • Retrenchment and deregulation • Conclusion

  2. Neoliberal tradition • Individuals rational utility maximizers • Self-interested • Act rationally and efficiently • Left to pursue their own narrow self-interests, society as a whole benefits • The less state the better

  3. Hayek and the Chicago school • Monetary policy • Governments tighten money supply during high inflation • Loosen it during times of recession • Task of government – stabilize monetary growth

  4. Neoliberal political theory • Stressed individualism, saw individuals as building blocks of society • Minimalist state produced better economy and society • Modern liberalism = society contained many historical inequalities; only state could level the playing field to give all people the same degree of freedom and opportunity

  5. Neoliberal political economy • People behave according to self-interest; they seek out opportunities to maximize gains • If opportunities are in market, self-interested behavior creates spin-off benefits, including new jobs, products, etc. • Solution: reduce size, role of state; free up market and make it attractive to entrepreneurs; remove opportunities for corruption, rent-seeking, and other economically harmful behaviors • Policy recommendations: less government intervention, more freedom in the market, abandon ISI in favor of outward orientation

  6. Neoclassical prescription • Structural adjustment seeks to make state and market more efficient to accelerate growth and eliminate waste • Places market at the center, relies on individual initiative, creativity, and ingenuity • Structural-adjustment programs (SAPs) • fiscal austerity • privatization • trade liberalization, currency devaluation, and abolition of marketing boards • Retrenchment and deregulation

  7. Fiscal austerity • Reductions in government spending • Tends to promote inflation • “Crowds out” private investors • Inhibits investment • Private investment becomes cheaper, and environment for business more attractive • Lowers costs of borrowing, which should encourage investment • Reduces overall consumption • More goods for export • Foreign exchange should flow in, stimulating economic growth

  8. Privatization • Abuses and inefficiencies often associated with public firms • Private firms have greater interest in maintaining efficiency and profitability • Raises money for cash-starved governments, enhances operation of market economy, improves efficiency and performance of privatized firms

  9. Trade liberalization, currency devaluation, marketing boards • Maximizing free flow of goods and services • Trade liberalization -- eliminate/reduce restrictions on imports; devaluation • Domestic market liberalization – eliminate price controls and marketing boards; devaluation gives producers of export goods incentive to increase production • Firms have to find ways to lower costs • Comparative advantage • Devaluation boosts agriculture by giving export-crop farmers increased income; farmers increase output

  10. Retrenchment and deregulation • Free market and entrepreneurs; enable market to function more effectively; encourage efficient resource allocation • Retrenchment addresses problem of corruption; reduces chances for abuse • Opportunities for rent-seeking diminish • Less patronage appointments • Fewer chances to use public firms or marketing boards to skim resources

  11. Conclusion • Losers = large, protected industries producing for home market, inefficient state firms • Winners = export industries, smaller firms, and farmers, especially export-crop farmers • 5/3, strengths and weaknesses of neoliberalism in practice

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