People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 50

December 12, 2010

The Success & Failure of Neoliberalism


C P Chandrasekhar


THE crisis in the eurozone is leading, once again, to the adoption of policies such as bail-outs and austerity that belong to the neoliberal paradigm that partly precipitated the crisis. In fact, a feature of the recent global conjuncture, starting with the 1997 crisis in East Asia and culminating in the financial crisis and Great Recession of more recent date, is that while economic events have discredited neoliberalism as an economic ideology, it continues to dominate policy discourse and practice.


Neoliberalism is of course an ambiguous and loosely defined term, even when restricted to the economic sphere. So it would be useful to clarify the sense in which it is being used in this context. In what follows, neoliberal theory and practice are taken as referring to:

(i)                the use of the rhetoric of market fundamentalism, in which the market or ostensibly “free economic exchange” is presented as the most efficient mechanism to work the economic system, to pave the way for the increasingly unfettered functioning of private capital, both domestic and foreign;

(ii)              the use of the notion of a minimalist state, to be realised by dismantling its developmentalist version, to legitimise the shift of various terms of trade and mechanisms of distribution in favour of the owners of capital and their functionaries and conceal the conversion of segments of the state apparatus into sites for primitive accumulation; and

(iii)            the pursuit of a regime of accumulation where, the home market and deficit-financed state expenditure are replaced by exports and debt-financed private expenditure as the principal stimuli to growth.


These features characterise even the developed world. One reason is, of course, the continued domination of the global economy by finance capital. Neoliberalism and financial globalisation feed on each other. Since the liberalisation of trade and of the rules governing the cross-border flows of capital result, in the first instance, in a widening of the trade and current account in the balance of payments of the liberalising economy, access to foreign capital to finance that deficit is a prerequisite for “successful” liberalisation that is not aborted by a balance of payments crisis. Thus, the pursuit of a neoliberal economic strategy is infeasible in a world where the access to international finance to developing countries is severely limited. On the other hand, foreign capital favours environments where markets and private capital are allowed free rein. Once trade and investment rules are liberalised to attract foreign capital, domestic controls on the operations of capital need to be diluted or dismantled. This includes controls on the operation of financial markets and firms with implications for the financial system and economic structure.




What has become clear over the last decade is that the neoliberal order has associated with it a set of outcomes that should delegitimise it. It is characterised by periodic crises of varying intensity, triggered by developments in capital, credit and/or currency markets, resulting in slow growth, rising unemployment and increased deprivation. The livelihood of those dependent on agriculture, which is home to much of the labouring poor, deteriorates and is even endangered. The free rein given to private capital results in predatory practices, as in forestry and the mining industry for example, that has devastating effects on the already poor and the marginalised and on the environment. It alters the form and curtails the volume of state spending, adversely affecting the degree to which the welfare expenditures of the state can redress these negative outcomes for a large section of the population. Overall, a neoliberal trajectory implies that the surpluses extracted from the productive sectors increase, damaging the livelihoods of the working people engaged in these sectors.


Not surprisingly, across the world it is a time of discontent, though governments claim that the worst is behind us. In the US, a president who came to power against historic odds is fast losing popularity, with his ratings in the 40s. His party suffered a setback significantly in the mid-term elections to the senate and the house of representatives. Barack Obama’s popularity slump has been a puzzle to commentators, since he has in the form of medicare, financial re-regulation and much else done more than many of his predecessors. But he came after the crisis had struck and roused aspirations that he has failed to meet. His failure is not that he has not done anything, but that what has been done is seen as too little. In the event, the government is being blamed for creating the problems it did not solve. And, in a queer twist of fate, big money and the most conservative right have exploited, however temporarily, the opportunity to undermine even the weak force that stands against them in the form of president Obama. At the forefront of this is the US Tea Party movement which has managed to convince some Americans that Obama’s government is tyrannical.


In France, union workers striking against pension reforms that sought to raise the retirement age were soon joined by students who called for a boycott of universities and took to the streets in often violent action. Memories of 1968 have been revived giving the movement a radical flavour, even if the expressed demands are limited. With oil blockades being part of the strike action, it brought the economy to near halt. And contrary to the government’s expectations the protest did not peak early and decline but spread widely and gathered momentum. Though, despite this opposition, the government has passed the pension reform through parliament, Sarkozy’s ratings have fallen sharply while support for the movement against reform is placed at around 70 per cent of the population.


Elsewhere in Portugal, Greece, Spain and Ireland austerity measures imposed to deal with deficits created by bailouts of financial firms are being opposed. England, where a massive austerity programme involving £81 billion in spending cuts and the loss of 500,000 jobs in the public sector has been launched by the Cameron government, has been rocked by violent protests by students who are protesting against steep tuition fee hikes in and budget cuts for universities. The unions here may not be as active. But, as many have argued, this is not because there is no resentment among workers. It is because historical factors have weakened and temporarily silenced sections that could stand up to the establishment. 




Despite these agitations, the opposition to neoliberalism wins few victories. This is partly because the neoliberal trajectory weakens certain important forces of opposition. Most importantly, neoliberal development weakens the organised working class in multiple ways. The numbers of the organised working class does not increase. Within wage employment, organised employment is the exception. Increasingly, the manufacturing sector’s contribution to organised employment stagnates and even declines. In sum, even when employment is in the organised sector, the nature of employment becomes informal and insecure, encouraging workers to turn away from unionisation and even organised protest.


The effect of all this is visible in the stagnation of the real wage in the organised industrial sector even when productivity is rising rapidly. This has meant a sharp fall in the share of wages in value added. Not surprisingly, unionism is on the decline and the effort to organise workers even to fight economic struggles, let alone transcend them, is proving increasingly difficult. This is of significance because the conditions of workers in the organised sector provided the benchmark for where wages and working conditions should settle. If those conditions stagnate and deteriorate the task of mobilising the unorganised, which has become structurally crucial for the opposition to neoliberalism is that much more difficult.


Finally, the dominance in practice of neoliberal ideology has been aided by the fact that in its phases of success, neoliberalism is able to and even relies on an expansion of consumption among the upper middle classes. Even when offered “contractual” employment with self-funded social security, leading sections of the middle class are bought off with high salaries and opportunities for credit-financed consumption. That offer is not the result of largesse to the middle class, but is part of the change in the regime of accumulation in neoliberal strategies, which has as its fall-out the cooption of a section of the erstwhile middle class, which provided the most vocal and articulate voices of dissent and protest in the past. Despite the crisis, that has yet to change.


The weak opposition and the dominance of finance is worsening matters considerably. The fundamental problems remain the same. Household balance sheets are under strain because of the legacy of debt accumulated during the boom. Unemployment is curtailing current incomes. And credit is either unavailable to or being avoided by those who need to expand consumption because of a collapse of net worth. In the event, private consumption expenditure in much of the developed world, which stagnated in real terms in 2008 and declined significantly in 2009, is unlikely to recover substantially in 2010. On the other hand, governments across the developed world, overcome by conservative fears of excess public debt, are holding back on public expenditure or resorting to severe austerity measures. Aggregate spending therefore is low. Not surprisingly, output growth remains sluggish.


It is to be expected that if spending is cutback to deal with the “problem” of public debt, then the recession that was partly overcome by debt-financed public spending may return. This did happen during the Great Depression of the 1930s when as a result of the stepped-up federal spending under the New Deal, an economy that had been contracting for four consecutive years (1930-33) returned to growth and bounced back sharply. Impressed with that growth and concerned about deficit spending and public debt, president Roosevelt cutback on deficit spending triggering a second recession in May 1937.


In sum, the fear that an early retreat from the stimulus would deliver a second dip is still with us, at least in the developed world. Even in the US, where talk of a stimulus is repeatedly heard, the requisite action to spur the economy is not forthcoming. This time too, therefore, finance has won. But it is a victory that worsens the conditions of populations that have been badly hit by a crisis that finance precipitated. Inevitably, therefore, resentment grows. As of now the protests generated by that resentment have been manipulated and misdirected (as in the US), have failed to realise their immediate objectives (as in France) or have been weak (as in England). But if as it did when it kept speculating its way to a crisis, finance capital is able to capture governments and pressurise them into worsening an already unbearable distribution of incomes and benefits between rich and poor, the protests could intensify and turn explosive. Unfortunately who would win and who would lose at that point is still unclear.