BUSINESS COMMENTARY

The Neo-liberal Future

by Nilio Gumbs, M.B.A. Lecturer,
University College of the Cayman Islands

 Monday, April 11, 2005

This article is part of the ‘Waves of Change’ series written by members of the Department of Business Studies at the University College Cayman Islands. www.ucci.edu.ky

The world economy has been through a period of economic liberalization. Internationally, trade has become freer and capital moves rapidly around the world with few restrictions. For less developed countries, recent economic development policies have taken a laissez-faire approach rather than directing efforts toward specific aspects of the economy. 

These neo-liberal economic policies have facilitated the rapid development of some countries, including The Cayman Islands. There is no doubt that the easy movement of capital internationally has been central to Cayman’s success. But these policies have not had such favorable results in other countries. 

Since the mid-1970s, freer international capital flows have been good for sophisticated economies, especially those with strong social structures that promote growth and rising standards of living.

For the less fortunate countries, neo-liberal polices have had almost two decades to take effect, but the predicted results have not been realized. Will neo-liberal policies continue to be the order of the day? Are there signs of potential change in the international economic order? 

Advocates of neo-liberal economic policies have often argued that an open economy with no capital and price controls, limited tariffs, a flexible labor market, and the privatization of the public sector is the best prescription for economic growth and development.

So their argument goes, corporations repatriating profits act as catalysts for foreign direct investment in developing economies. Low tariffs facilitate open competition in international trade and lower inflation at home, if international cost and price structures are lower.

A flexible labor market promotes its mobility. This makes for lower labour costs for producers. With ample and mobile low skilled labour, there is easy access to cheap employees looking for full-time or even temporary employment. 

Neo-liberals also believe that the privatization of traditionally public sector activities leads to greater efficiency and quality of service.

An opposing view is that the advocates of neo-liberal economics have failed to recognize the differences in economic development among nations. Neo-liberal economics may hold true in developed economies, with well developed educational institutions, a sophisticated human capital stock, and where workers can easily retrain for new job opportunities.

In small, open, less developed economies such dynamics may be different. Using Jamaica as a case in point, it is evidence that the adoption of neo-liberal economic policies in the 1990s has been a failure. 

The liberalization of the Jamaican economy has led to the influx of cheap foreign imports of all sorts, widening the current account deficit (imports exceeding exports) and promoting the depreciation of the Jamaican dollar. In addition, many factories have closed in the face of such foreign competition. 

The dairy industry in Jamaica became much smaller due to stiff competition from subsidized and cheap imports from the European Union. 

During the 1990s, many Jamaican manufacturers saw fit to relocate production to low wage countries such as Mexico, and export their products back to Jamaica.

The privatization of electrical utilities has not brought the intended benefits many critics have argued. Instead, Jamaican consumers are faced with higher utility bills.

A flexible labor market in small open economies, with a small and limited manufacturing and service sector, has proven to be a recipe for social unrest. 

Some have suggested that the limited size of these markets prevents - rather than promotes - the mobility of labor and exposes workers to the vagaries of an unconstrained capitalistic system, with virtually no social safety net. Adding to the problem is the lack of strong social institutions that promote growth.

Many small, developing economies do not have the educational infrastructure that can facilitate the retraining of workers. This results in higher unemployment, and exacerbates the hardship within many households. The crime-poverty connection is often the result.

Those who recognize the social realities have proposed that a minimum wage and strong trade union representation in the labor market could protect workers’ rights, and not detract from the socioeconomic development of small economies. However, such developments are contrary to the neo-liberal agenda.

Yes, increased foreign direct investment has stimulated economic growth in some sectors of developing economies. However, allowing multi-national corporations to control the commanding heights of the economy, and repatriate the profits they generate, is an anathema to many. 

President Putin of Russia has argued that resources such as oil and natural gas are the wealth of the country and should not be controlled by multi-nationals and their shareholders.

The people of Venezuela, Argentina, Brazil, and Uruguay, tired of the hardship caused by neo-liberal economic policies, have elected governments that have resisted the neo-liberal trend, thus revealing the popular view that such policies are no panacea for economic growth. However, it is still unclear if these new governments are having any more success than their neo-liberal predecessors. Certainly there is a general uneasiness about the current state of economic progress in many developing countries. 

With the neo-liberal agenda having mixed reviews around the world, pressures for change in the international economic order is growing among less developed countries. This will have unavoidable implications for other countries, especially those most active in international business, such as Cayman.

Anticipating such change, aligning the institutions that can constructively react to potential shifts in the international economic order will determine who will best withstand these waves of change.

The author welcomes comments, at ngumbs@ucci.edu.ky

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