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 been coined 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 influence on human growth, and if not, what were the negative consequences and alternative policies? In this scholarly paper, the negative effects 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 wrapped up in a lucid manner.
Developing countries experience with neo-liberalism and globalization explores the various aspects of neo-liberalism and globalization and their impacts on developing countries (Siddiqui 11). The origins of neoliberalism may also be viewed 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). Like any other Social Structure of Accumulation, neo-liberalism came to the rise after the crash of the Keynesian policy systems (Kotz 5). After the depression of the 1920’s, it was determined that the causative agent behind the economic crash was excessive and speculative lending. 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).
Negative Impacts of neoliberal development policies
Financialization has been known as the cause for the adoption of neo-liberal policies in Ecuador, semi-periphery, and other periphery countries. It refers to an economic process whereby exchange is usually facilitated through the intermediation of financial tools. For example, real good and services exchanged for currency thus making donors able to rationalize their income flows and their assets. 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 assistance from the World Bank and IMF for loans. The then Ecuadorian President Osvaldo Hurtado 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. After signing the agreements, his predecessors also followed his path and 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 also 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 living 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. This is another pointer that neo-liberalism policies had negative effects on the political, social, and economic life of Ecuadorians.
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 Multinational Corporations (MNC’s) which stand as the biggest pushers for globalization worldwide (Siddiqui 19). 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). Reduction in trade restrictions, global trade has seen an overall rise in developing nations. 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 less privileged was 3:1 (Verma et. al 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 in developing nations, and evidently, negative effects of neo-liberalism on them.
Case Study
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 like health, education, 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. 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. When his term ended 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.
European nations failed to create independence and economic sufficiency among their vassal states despite their natural wealth (Leonard 63). This goes to show that the colonial legacy still affected them way after independence. 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 Ecuador.
Alternative Policies
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). The plan was implemented to assist Ecuadorians who could not afford medical care and social services. Its primary goal was to promote a healthy lifestyle among citizens of Ecuador through education and provision of free social amenities to the less privileged individuals in the country. 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). Ecuador’s development in the social sector has been based on three policy aims: distributive policies, direct transfer and subsidies policies and universal policies.
Distributive 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. The resources it offers Ecuadorians include affordable health care, free education in institutions, and infrastructure development in all parts of the country. 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 important 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 (European Report on Development 7). 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). The Direct Transfer and Subsidies Policies ensure that every citizen of Ecuador lives in good condition despite his or her economic background. The aim of the established policies was to reduce poverty in Ecuador.
Universal Policies
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. Scholarships are also given to bright students and also those who excel in Sports to pave the way for their brighter future. 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
Government accountability
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. Transparency has also been the government’s goal of ensuring that citizens fully believe in their leadership system (Bates 113).
Economy
Finance Enablers
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 (Bates 127). 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 years such as for oil price stabilization and debt servicing funds and injection to the national budget for development in education, health infrastructure among others.
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 (Gamso 30).
Conclusion
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 managed to reduce poverty level in Ecuador boosted their economy and promoted human development.
Works Cited
Verma, Saraswati Bhadia, et al. Globalization at the Crossroads. Sarup & Sons, 2008.
Kotz, David. Neo-Liberalism and Financialization. Political Economy Research Institute, 2012.
Bates, Diane. C. “The Barbecho Crisis, La Plaga Del Banco, and International Migration: Structural Adjustment in Ecuador's Southern Amazon.” Latin American Perspectives, vol. 34, no. 154, 2007, pp. 108-122.
Gamso, Jonas. Political Economy of Ecuador in the Neoliberal Era Of Development. The University of Toledo, 2010.
Leonard, Thomas. Encyclopedia of the Developing World. Routledge, 2006.
Nehring, Randall. Social Protection in Ecuador: A New Vision for Inclusive Growth. International Policy Centre for Inclusive Growth, 2012, https://ideas.repec.org/p/ipc/pbrief/28.html. Accessed 14 March 2017.
European Report on Development. 1st ed. 2014. https://ec.europa.eu/europeaid/sites/devco/files/erd5-country-illustration-ecuador-2015_en.pdf. Accessed 14 March 2017.
Siddiqui, Kalim. Developing Countries' Experience with Neo-liberalism and Globalization. Research in Applied Economics, vol. 4, 2012, pp. 6-12.
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