Neoliberalism is a catch-all term for a series of measures that have been used to stimulate economies in different regions and international trade. The word “global south” has come to refer to the third world or developed countries in general. Latin American countries, Asian regions, and African countries are included. Among all of these countries, Ecuador has been chosen for this study to explain the effects of neoliberal policies in developing countries. Thus, the aim of this essay is to decide if neoliberal policies in Ecuador had a positive effect on human growth, and if not, what were the negative implications and alternative policies? In this scholarly paper, the impacts of globalization in the core and the periphery countries, the role of the IMF/World Bank and MNC’s in neo-liberalism, negative impacts of neoliberal policies in Ecuador, and the alternative policies are well reviewed. A conclusion that has my interpretation on the findings and elucidates what the case study adds to the wider prose on the neoliberal reforms impacts will also be summarized in a clear manner.
Siddiqui (2012) in his paper, “Developing countries experience with neo-liberalism and globalization” explores the various aspects of neo-liberalism and globalization and their impacts on developing countries. He describes the origins of neoliberalism as an attempt by political leaders of the time in advanced nations to curb the growth of organized labor and the threat it presented (Siddiqui, 13). For the developing countries, he continues, “the growing need for a more independent path in their post-colonial development (p.13).” He points Neo-liberalism origins to the liberal world order (1870-1913). A period the aims of which were etched in unregulated financial globalization. The period witnessed economic activity with London as its hub and the pound as the currency for settling international transactions. It was also at this particular moment that the European powers utilized their military might to subjugate continents to their rule for their gain.
Like any other structural adjustment policies, neo-liberalism came to rise after the crash of the Keynesian policy systems (Kotz, 2012). After the depression of the 1920’s, it was determined that the causative agent behind the economic crash was excessive and speculative lending. The beginning of the Second World War kicked the countries into high industrial gear and led to an ending of the depression. However, after the war, it was determined that to avoid the economic crisis of the 1920’s the government had to regulate financial items within the Economy (Keynesian model). The Keynesian model involved the movement of both capital and goods for income, state control of financial institutions and regulation of markets. (Siddiqui 16-17). The economy performed relatively well in the years of 1948-1970 when another economic crisis ensued (Kotz 03). This led to the adoption of the neo-liberalism policies whereby they involved:
Removal of barriers that limits free movement of goods, capital, and services all through the entire global economy and a withdrawal by the governments from the duties of regulating and guiding and activity; thus, privatization of public utilities and state enterprises. The slashing of government’s social programs and also a shift revert different forms of taxation. The policies also involve a change from cooperation between labor and capital to a drive by capital, with assistance from the government, to exhaustively dominate labor and the replacement of co-respective behavior by large corporations with unrestrained competition. (Kotz 3)
Siddiqui (2012) also states that neo-liberalism policies primarily dictate an economy where the state minimally interferes with the economy where its principal objectives lie in setting up and protection of the market (Siddiqui 15). This trend promotes entrepreneurship and is mostly consumer-based (p.15). Neo-liberalism is a based on a neo-classical model that follows the general equilibrium model (p.17). In this process, the buyer and the seller acting out of self-interest can set different prices for goods where the supply and demand for goods and services are evenly matched (Williamson 15, cited in Siddiqui 17).
Financialization has been debated as the cause for the adoption of neo-liberal policies, but Kotz (2008) has argued sufficiently that neo-liberalism more or less set the platform for financialization to kick in. The Neo-liberalism ideas were catapulted by then US President Reagan and UK Prime Minister Margret Thatcher (Siddiqui 15). However, despite widespread resistance to neoliberal policies in Ecuador, Financial causes were the major drive to neoliberal reform acceptance by the government. The country experienced multiple crises in their economy commencing with the 1982 Latin American debt crisis thus prompting President Osvaldo Hurtado to seek loan agreement from the IMF and World Bank (Gamso 30).
Neo-liberalism has been achieved primarily through globalization whereby globalization is the process by which countries, develop interdependence amongst one another. Globalization has been made possible by some factors ranging from political to technological. Most important under globalization are MNC’s which stand as the biggest pushers for globalization worldwide (Siddiqui 19). MNC’s stand for Multinational Corporations and represent any company with branches outside of its home state or country. Neo-liberal systems allowed MNC’s to perform international trade with minimal cost (Siddiqui 22). Movement of capital and goods between countries increased during this time, and the developing countries started receiving foreign investment and settling on of MNC’s (Siddiqui 22). The move to set up in developed countries was largely influenced by their less strict laws on environmental pollution and the availability of cheap labor (Siddiqui 19). Due to setting up of companies, however, interior areas were opened up to development and employment and capital in Foreign Direct Investment (FDI) received into countries.
The Impacts of Globalization in the Core and the Periphery Countries
Polanyi states that neo-liberalism and free trade are nothing new (Verma, Upadhayay, and Bajpai 46). They are based upon nineteenth-century theories that have no understanding of the ‘real’ world. He continues that nowhere in history has liberal philosophies failed so conspicuously as in enacting change. He further notes that the by the elimination of all internationalist policies from the system to restore its self-regulatory feature in the 1920’s, the results were a great depression. He, therefore, concludes that a self-regulating market is impossible either socially or politically. An attempt at deregulation of the system either results in unstable, speculative economy or to such accumulation of wealth which leads to a social reaction where the government has to intervene and “control” the market.
Away from the observations of Polanyi, it is important to note that with the reduction in trade restrictions, global trade has seen an overall rise in developing nations (Verma, Upadhayay, & Bajpai 48). However, a decline in living conditions with the levels of inequality, marginalization, and poverty increasing has also been witnessed. According to the UNDP in the 1820’s, the beginning of the industrial revolution, the gap between the richest, and the poorest was 3:1 (Verma, Upadhayay, & Bajpai 48). The difference only rose to 11:1 in 1913, when the colonies were merged into a global economy and globalization was at its peak. During the 1950’s the difference was placed at 35: 1 where it rose to 44:1 and later in 1998 was set at an astonishing 72:1. This is a clear impact on the effects of globalization on the different economies. Developing nations have been unable to benefit from increased trade over the years among the nations, unlike the developed countries. Clearly, for them, neo-liberalism has had adverse negative effects.
Negative Impacts of neoliberal development policies on human development in Ecuador
The execution of neoliberal policies in Ecuador had nearly similar demoralizing impacts with the rest of Latin America countries. By 1999, almost two decades after the neoliberal policies were employed in Ecuador, the country’s government spending on its citizen’s education was a sheer 0.7% of its budget, which was 5.5% down when compared to 1981 (Gamso 29). The government spending also on health sector was less than 2% of its budget, which was also 10% when compared to 1981. In the meantime, Ecuador’s debt payments had reached 45% of its expenditures in the year 1999.
Around 70% of the country’s population was also living in poverty in 2000, whereby the majority of poor people resided in the rural areas. The rate of unemployment had also escalated from 26% in 1980 to 15% in 1999 whereas the rate of underemployment has increased from 31% to 46% over the same period. By 1999, the inequalities had also escalated whereby 20% of Ecuador’s wealthy individuals owned 73% of the total state’s wealth. Ecuador’s economic indicators were bleak since even the inflation rate wages fell from actually 13.8% in the year 1981 and consecutively 11.9% in 1982; thus, showing how the growth in GDP percentage was drab (Gamso 29). Amid 1982 and 2000, the growth in GDP percentage was negative for almost eight years and barely higher than 2% in three years. In addition to Ecuador’s adverse impacts, its politicians also became disreputable corrupt destabilizing the country’s economy. Due to the poor social, economic, and political situations, between 1995 and 2000, around 2 million citizens of Ecuador (16% of its population) relocated to other countries that could offer them better opportunities like U.K, U.S, and Spain. The neoliberal policies also exerted a lot of pressure on Ecuador’s government to augment its oil extraction in the Amazon to enhance revenues that would, in turn, be utilized to pay the debts (Gamso 31). Thus, leading to distressing environmental impacts, and also cultural and social implications for the indigenous individuals of the Andean region, who reside in Ecuador’s coastal side. All these neoliberal development policies illustrate how they had dissatisfying and negative impacts on Ecuador.
The IMF and the World Bank hold a considerable sway over the policies deployed in developing nations (Verma, Upadhayay, & Bajpai 47). During the 1980’s, external debt formed a basis for the IMF to pressure governments into opening up their market to foreign investment. Seventy of the developing countries by the end of the 1980’s were forced to accept IMF structural adjustment programs as a way to boost trade and increase globalization. (Siddiqui, 20-21). Ecuador due to multiple economic crises that started with the Latin American debt crisis in 1982 was also forced to seek aid from the World Bank and IMF for loans. The then Ecuadorian President Osvalo Hurtaldo in 1983 negotiated the country’s initial IMF loan agreement thus placing the country on the path to neo-liberalism (Gamso 30). The loan was made on 24 conditions that the government to cut its expenditure on healthcare, education, public sector jobs, and subsidies. Despite public opposition, neo-liberalism steadily became the political and economic development model. Between 1985 and 1994, Ecuadorian presidents signed six loan agreements with IMF thus devaluing the country’s currency and privatizing some state industries. This led to the government’s inability to control the flow of capital from the country and resulted in the accumulation of wealth amongst a few in the developed countries. This is yet another indicator that neo-liberalism policies have had a negative effect on developing countries.
Ecuador was a lowly populated country but saw an increase in the 1960’s post-oil discovery (Bates 113). Before the discovery of oil in Ecuador in 1960’s Ecuador majorly relied on agricultural produce for export such as coffee, cocoa, and bananas (Gamso 20). Oil revenue in the 1960’s and 1970’s saw the growth of the economy and increased government spending. However, state spending increased to such a point that, revenue from oil export could not cut the cost of social spending and infrastructure development (109). The government turned to lending organizations to fund capital expenditures (109). As a result, the national debt quadrupled between the years of 1975-1978 and then doubled before 1980 (Bates 109). Social spending was further increased by the need for the military government obtains governmental approval (109). Spending on services such as education, health, and infrastructure in the urban areas was thus maintained or expanded (109). A transition was later made where Jamie Roldos and Osvaldo Hurtado came to power.
They promised to reduce state spending and keep infrastructure development (109). However, the political climate in the region during the election of those two oversaw the return of regionalism. As such the country was split into two opposing ideologies and the climate became unfavorable for development. When Jaime Roldos passed away in a plane crash in 1981, Osvaldo took office promising to carry on the work of his former colleague (110). In the winter of 1982, the country experienced severe El Nino showers that led to the destruction of agricultural produce in the coastal region estimated at $650 million (Gamso 29). Immediately, the state commenced the talks with the IMF to prevent the crisis from escalating. Structural adjustment policies were then introduced with the first austerity plan set in place in May 1982 (110). This led to the devaluation of the Sucre by about a third of its value (110). In October more reforms were instituted with the doubling of the prices of gasoline, increases in tax and the removal of some food subsidies (110). The government, however, resisted some structural reforms that were unpopular among the urban working and middle classes amongst whom the government owed its legitimacy. In 1983 the state’s GDP fell by 3.3%. No policies had been set in place to curb state spending.
The lack of action led to a strong opposition against the Hurtado administration (110). The coastal elites were supporters of neo-liberal policies as they stood to gain much from it. In 1984, Leon Fabros Cordero won the election and immediately set to liberalizing the economy. He privatized state firms, removed import tax for most items, removed price controls and searched for foreign investors. His administration oversaw increased interests in loans. The late 1980’s saw the decline in oil prices which further aggravated the situation in Ecuador. Election of Rodrigo Borja did not help the situation, he did not like neo-liberal policies, but the country’s external debt left little choice (110). By the end of the 1980’s many Ecuadorians were at or below the poverty line. Cut backs on state spending increased resulting in deteriorating infrastructure, roads, and medical facilities. The prices on gasoline spiked further limiting transportation (110-111). The low quality of crude under Durano Ballen presidency limited the income that was obtained from crude. His tenure saw a reduction in the protectionist acts and oversaw the drastic withdrawal of state intervention from the economy by amendment of the Hydrocarbon Law (Gamso 31-32). When his term came to an end much of Ecuador’s economy was financed by FDI, and the state had little control over the market (Gamso 32). Abdala Bucaram (Bates 111) was later elected in 1996 after promising to end structural adjustment policies and improve social infrastructure, but his regime was followed by unprecedented levels of corruption.
The Congress then removed him terming him as “mentally unfit.” (111) Alarcon replaced him, who was later replaced by Mahuad whose tenure was marked by the collapse of the Ecuadorian banking system after world oil prices crashed. He proposed dollarization as an alternative but was removed from office (by interest groups such as the army), and Gustavo Noboa took office (111-112) completing the dollarization project. Dollarization ended inflation and oversaw better returns for the people of Ecuador. Lucio Gutierrez was late elected in 2002 but was removed due to corruption charges; Alfredo Palacios replaced him but faced political challenges from Abdala Bucaram, the exiled. Ultimately, Rafael Correa won the presidency in November 2006, and the country has seen significant improvement under his rule.
Leonard implies that the European nations failed to create independence and economic sufficiency among their vassal states despite their natural wealth (Leonard 262). This goes to show that the colonial legacy still affected them way after independence. Leonard (2006) also mentions a few started in Africa where the colonial masters left them at their infancy before they were ready to rule themselves or without infrastructure. Most of these countries were therefore not willing to open up their markets to free trade, and their colonial masters were somewhat to blame for it. It can be sufficiently concluded with the case study evidence presented so far that, the neo-liberalism human development policies have impacted negatively human development policies in the global South.
Since Rafael Correa came to power in 2006, Ecuador has seen changes in development strategies and the implementation of a national development plan, the Buen Vivir strategy (plan for healthy living). Adoption of a new constitution in 2008 has provided an opportunity for social protection policy development and presented a new approach to economic development (Nehring 1). Various ministries and organizations were established under the 2008 constitution concerning Buen Vivir strategy. Although the institutions are quite young, they have begun to work together towards the common goal of human development (Nehring 1). Ecuador’s development in the social sector has been based on three policy aims: distributive policies, direct transfer and subsidies policies and universal policies.
Refers to where the government acts as a distributive agent. Its ability to perform this role is based on its capacity to obtain these resources and the allocation policies set in place. Since 2007, there has been an overall need for a change in allocation policies. There has been therefore an increase in social spending from 27% in 2001-2006 to 40% in 2007 with the current government and constitution (European Report on Development 7).
Direct Transfer and Subsidies Policies
Most notable are the Human Development Bonus (BDH) – a program to aid the needy households in the country. It increased from $15 to $35 in 2007 to $50 in 2012. The BDH can be used to guarantee loans (Human Development Credit) for households benefitting from these programs at 5% APR a year for amounts ranging from $1800 – $3600. A bonus has also been created for people with disabilities. The government also continues to secure subsidies on cooking gas and gasoline and instituted different rates for public services based on a range of factors: age, the level of usage, commercial, domestic, non-profit and disabled (European Report on Development 7).
These are systems that involve elimination of barriers to education and access to health care to achieve universal coverage. The $25 amount that was previously used to register pupils in primary and secondary institutions has been removed. School books are now being distributed for free as are uniforms for children in the rural areas. Health wise, the cost to see a doctor has been removed and the access to free essential medicines expanded. The budget spending in these two areas has been increased as to increase service availability in the sector. The new constitution has also made public university education free (European Report on Development 7).
Creation of the MIES (European Report on Development 8) – Ministry of Economic and Social Inclusion (Ministerio de Inclusión Económica y Social) has been charged with overseeing the growth process and providing the institutional framework for the social programs. The principles underlying formation of MIES include:
The right to healthy living as dictated by the constitution- Adequate food, work and conditions of life.
Fair trade and ethics in business
Gender equality and respect for cultural identity
Through the MIES and the Buen Vivir strategy, the government has been able to enact social protection programs and to create a platform suitable for combating poverty and promoting human development.
The 2008 constitution enforces the government presence in the market. This works to strengthen its fiscal policy by linking it to the national development plan. The economic tools are not only necessary for market control but also the achievement of development goals. The previous constitution did not prioritize planning or programming that is prevalent in many policies nowadays.
A review of the budget also showed what little control the government had over it following politics and the pre-existing laws of the time. The new constitution afforded, however, the opportunity to correct this scenario. The increase in government spending between 2007 and 2008 represented not only an increase in oil prices but the right policies that had been instituted to give control back to the government. The new constitution defined the position of the government concerning its natural resources. For example, private companies could not earn a larger share of the profits than the state. It also set the stage for enactment of the hydrocarbon law and through it has the oil sector seen the significant transformation. The law mandated the changing of contracts from profit sharing to service contracts, the introduction of a 25% ‘Sovereign margin’, and the launch of an institution to monitor and sign oil contracts. This saw seven of the ten companies in the region leave the country. Oil production dropped but picked up after finalization of the contracts. The budget reforms also worked to include removal of additional funds set up in the previous year’s such as for oil price stabilization and debt servicing funds and injection to the national budget for development in education, health infrastructure among others.
Tax reforms were also done to increase tax resources available to the government. These policies included systems improvement to handle a unified tax process, incorporation of invoices to reduce fraud and improve VAT performance. Amnesty for tax payers past due was also introduced to increase compliance.
Dollarization has enabled the government control flow of capital out of its country. For example, a 5% tax is imposed on capital exit. This reduced mobility has increased stability in the financial sector. There has also been a reduction in national debt. With a default on Brady bonds debt in the summer of 1999, the debt buyback operations- the debt reduction fiscal policy and the default on external debt in December 2008, the debt to GDP trend has significantly reduced. Taxes and oil revenues have increased government spending, and it can now focus on providing a better life for its citizens.
From the conducted research, “The Impact of neo-liberal development policies on human development in the global south,” it can be evidently seen that for the developing countries, globalization, and neo-liberal development policies have been unable to benefit them. The rising global trade and free market policies have caused developing nations such as was in Ecuador little control over their markets and led to the death of industries such agriculture thus leading to unemployment and migration to urban centers where living conditions worsen due to congestion. A lot of capital from the developing countries has ended up in the hands of a few in the developed nations, and the global inequality levels stand at an overall high. I conclusively applaud the President of Ecuador, Rafael Correa who came to power in 2006, for the alternative policies, which he implemented that changed the social, economic, and political status of Ecuador. The reforms included the implementation of a national development plan, the Buen Vivir strategy, adoption of a new constitution, creating universal policies, enhancing direct transfers and Subsidies policies, dollarization, and tax reforms that have reduced poverty level in Ecuador, boosted their economy, and promoted human development.
Bates, D. C. (2007). The Barbecho crisis, la plaga del Banco, and international migration: structural adjustment in Ecuador’s southern Amazon. Latin American Perspectives, 34(3), 108-122.
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