NeoLiberalism Creates Income Inequality and Poverty Case Study: Jamaica (Part 1/3) by Renaldo McKenzie

Many economic and social scientists have asserted that Neo-Liberalism creates inequality and poverty. Indeed, Human beings are nomads who have been traveling from place to place all their lives, because of an inequality of opportunities. This mobility has increased significantly because of neo-liberal globalization. Neo-liberal globalization, putatively based on the free movement of people, goods and services across borders, has largely ostracized the masses in the global south exploiting their labor and limiting their freedom of movement, while capital is free to go wherever it desires. However, it was always the belief in some quarters that the free-market is essential and indispensable to economic growth,  equality, and poverty reduction. 

Neo-liberal capitalism was to be the new world order that deposes the old feudal system where production was centered around ownership of land by the nobility (few) who received tribute from serfs. Capitalism or Liberalism would usher in an industrial society that would ensure greater mobility through increased educational opportunities and employment in order to generate greater efficiency and profit. Hence, the new means of production became industrial in the form of ownership capital and factory by the bourgeoisie, which presided over an unequal exchange leading to the exploitation of the proletariat (working class).  Neo-Liberalism owes its ideology to Adam Smith, the father of modern liberal economics or liberal economics. In 1776, he advocated in his work Wealth of Nations for less government involvement in economic matters, free trade, and the removal of barriers and restrictions to trade.  Essentially, he was promoting free competition, which would facilitate greater efficiency and profit. 

However, the question is, profit for whom, what, where, and when. Certainly, by the 1920s and early 1930s, it was clear that free-market system benefitted the few (capitalists). This economic system led to the Great Depression.This, in turn, led to the promulgation of Keynesian economics from the 1930s - 1950s, which balanced private with public sector responsibility. In the US, the economy grew after WW2 began in 1939. This benefitted a burgeoning middle-class. By the 1970s, it was clear that upper-class profits/wealth, in the US were under pressure and this led to the revival of Adam Smith’s economics. The protestant ethic that Weber assumed defined the Western Judeo-Christian societies -frugality, parsimony (savings), and hard work – gave way to a new  protestant ethic of affluence, greed, and nepotism, a new ethic that neoliberals of the “Washington Consensus”  transplanted to Jamaica and the rest of the world. 

What is the role of the “neo-liberal state”?  According to neo-liberal theory, the state should favor strong individual private property right, the rule of law, and the institutions of freely functioning markets and free trade to guarantee individual freedoms and a better way of life. But in our previous research, we learned that the neoliberal society is not flat. The somewhat chaotic evolution and uneven geographical developments of state interventions, powers, and functions over the last thirty years suggests, furthermore that the neoliberal sate may be an unstable and contradictory political form. Neoliberal theorists are suspicious of democracy. They saw Governance by majority rule as a potential threat to individual rights and constitutional liberties. According to David Harvey (2007) (who will help us to decipher and discuss some of these questions and concepts), this poses a contradiction for reflection between a seductive but alienating possessive individualism on the one hand and a desire for a meaningful collective life on the other. He explains that while individuals are supposedly free to choose, they are not supposed to choose to construct collective institutions such as trade unions as opposed to weak voluntary associations like charitable organizations. They should not choose to associate with political parties that force the state to intervene in the market. To guard against their fears, the neoliberals use undemocratic means such as the Federal Reserve or the IMF to make key decisions. This creates the paradox of intense state interventions and government by elites and experts in a world where the state should not intervene. Yet James Bovard(1985)  blames Jamaica’s poverty and worsening standard of living as directly related to their unwillingness to accelerate the process of deregulation and liberalization towards a free-market economy, rather than this uneven economic system that “commodifies” and fetishizes human relationships, generating and institutionalizing inequalities and poverty. 

In fact, proponents of Market-based development such as Bovard point to the “Gang of Four” Asian countries, which  arguably benefitted from capitalism and enjoyed economic prosperity and an increasing standard of living. The theory is that the market propels growth, thus Jamaica needs finally to ‘plug into this system’. However, Bovard assumes that the Asian Tigers’ experience of neoliberal restructuring was seamless, practical and transportable everywhere and would yield the same results.  Nevertheless,The Asian Tigers practiced an extreme curtailed version of neo-liberalism that actually resembled a mixed-Keynesian system.

What was common about these tigers was that they blended free-market systems with strong state involvement/intervention. There was heavy government investment in education, non-democratic and relatively authoritarian political systems during the early years of development. Modernization theorists, particularly W.W. Rostow, believe that economic growth is possible in the third world and that it follows a certain determined pattern that includes the traditional stage; precondition for take-off; drive to maturity and finally, the age of mass consumption.This is a theory of development, which asserts that only good things will come from market-based development that includes economic growth, according to John Gafar (2004), the higher the gross national income per capita of a population, the lower the gini

 index/income inequality. Therefore economic growth should be poverty reducing.  

In doing so, neo-liberals have maintained an orthodox position of development, stating that …there need not be separate ‘development’ policies for third world economies; what was good for the developed west was good everywhere else. Moreover, as a means of resource  allocation imperfect markets are better than imperfect states. This was the rationale behind the conditions imposed on Jamaica as part of debt rescheduling agreements and SAPs. According to the former PM of Jamaica, Michael Manley, in a documentary interview, the government of Jamaica wanted capital or loans to cover its debt, meet  its financial obligations and embark on long-term  development, which would lead to self-reliance and economic growth.

However, the neo-liberal operatives (International Monetary Fund (IMF), World Bank (WB), and the Inter-America Development Bank (IDB) - had their own agendas and would only lend to Jamaica on a short-term basis with high interest rates and strict conditions that included the slimming down of government’s involvement in the economy. A reduction in government’s role would ultimately result in the emergence of lower wages and the further penetration of the neo-liberal capitalist in Jamaica. The fact of the matter is that reduced government/social alternatives created conditions that created further inequality.  Fabrizio  Eva argues that in capitalist economies, economic inequality is acceptable because it is the engine of growth and that inequality brings richness.

“Free market” economists continue to maintain that neo-liberalism leads to economic growth which is poverty reducing. In addition, poverty is eliminated, according to the UN, when earnings exceed US$1.25 per day.  Therefore, if I earn US$1.27 or even US$2.00, I amnot poor. Nevertheless, US$2.00 per day can hardly suffice if the cost of living increases. Further, US$1.25 per day cannot guarantee a decent level of comfort, stave off future hardships, and improve anyone’s standard of living given the cost of education. 

Simon Kuznet proposes an “Inverted-U Hypothesis”. He theorizes that in the early stages of development the distribution of income would worsen, while at the later stages it will improve, (see Figure 1 showing a graphical representation of this:

Nonetheless, Jamaica has barely experienced economic growth. Inequality from 1960s to 2008, has fluctuated between gini 0.45 to 0.47, yet poverty has fallen sharply from 30 percent to 9.9 percent, which questions the validity of the assertion that neo-liberal economic development leads to economic growth and by extension greater equality and less poverty.

In fact, the World Bank in defending its position and record of accomplishment in this project appears to object to any study that attempts to conduct any analysis that compares pre-structural adjustment with post structural adjustment and or non-structuralist with 

structuralist countries. They maintain

 that such an approach is fallacious and based on the view that SA is done in a vacuum. Further, the World Bank declares that SA was imposed on countries like Jamaica to remedy their macro-disequilibria and not to deal with poverty and inequality and that in theory SAP was the best approach in practice  vis-à-vis others.

However, this reasoning is biased and very hypothetical; it begs the question by assuming that no other alternative would work in practice but the approach it took. Furthermore, we must weigh the efficacy of a remedy weighed in terms of its ability to achieve its set objectives. This is done by measuring how far along the prognosis has taken us, because the fact is, as we will illuminate further, that SAP has not improved the social and economic living standards of Jamaicans significantly, but created a dependency and very small pockets of wealth.

Actually, Clarence Henry in a lecture at the University of the West Indies seems to refute the World Banks position stating that SAPs were imposed based on the neo-liberal assumption that all countries are the same and that industrialization follows a similar pattern. However, Jamaica needed a stronger market institution before it could absorb SA. 

Moreover, the question is not more or less government, but how to transform the government into a facilitator role, ensuring development without abandoning social responsibility. He calls this SA with a human face, which extends former Prime Minister of Jamaica (1981 – 1989), Harvard graduate, the late Hon. Edward Seaga’s phrase at a meeting of the United Nations, “SA at a human pace”.

 Hence, it is not true that there was no alternative to dealing with Jamaica’s debt or disequilibria. We alluded to a Former PM of Jamaica(1970 - 1980, 1989 – 1992), Graduate of the London School of Economics, Hon. Michael Manley, who explained that the WB and IMF scoffed at any alternative suggestion by Jamaica to borrow capital that addresses the short-term debt crises and positions Jamaica on a long-term economic path to growth and self-reliance. The issue here was expanding a neo-liberal idea that  Jamaica was forced to accept, which exacerbated their debt burden and prolonged their dependence and “hand-to-mouth” economic policy, which in turn 

debilitated their ability to develop their economy to achieve self-reliance, less poverty and greater equality. 

Neo-liberal societies do not create  equality, because, according to Robert Pollin, (2010), the system rewards winners and punishes losers. So what is the big deal? So what if Jamaica had poverty or inequality? The fact is poverty and inequalities are unavoidable in the world, in that they function to reward those who are most deserving, according to Pollin. This conservative view preserves the status quo and fails to see how a few special interests use unfair and coercive means to gain their rewards. The few with the capital in society determine what jobs are important and reward accordingly. The society determines who performs such jobs, by making it difficult to reach those jobs with the exception of a few cases created to give the impression that “if you work hard, you will succeed” in this capitalist neo-liberal world.

 

“On the contrary, the social judgment that inequality is justified by an “allocative  criteria” that is unfair and dysfunctional for society was the national consensus in virtually all advanced market economies [of the social-democratic type]”. Jamaicas Governments such as Hon. Bruce Golding, former PM in 2009 seems to favor or accept this inequality of opportunities and wealth trying to adopt dependent capitalistic policies.. No wonder Jamaica’s inequality lingers around 0.45 without any signs of improvement. Moreover, widening income disparities may not only raise welfare and social concerns, but may also limit the drivers of growth because the opportunities created by the process of globalization may not be fully exploited. 

Hence, “Third World” countries over the years have objected to globalization citing it is unfair with skewed benefits. This has led the IMF to conclude, in a study that examines the relationship between poverty and inequality and globalization, that the “sustainability of globalization will also depend on maintaining broad support across the population, which could be adversely affected by rising inequality.”

Surprisingly, the IMF in this report maintains that there is a relationship between the rapid pace of trade and financial globalization and the rise in income inequality observed in most countries over the past two decades. Further, the IMF suggests that inequality can be reduced with policies that broaden access to education and reduce trade barriers.

In 1991/92, there was an acceleration of neoliberalism in Jamaica, in which the Jamaican government implemented greater financial deregulation and reform, so that by the mid-1990s, the financial and banking sectors collapsed and the country underwent severe economic recession. Hence, like David Moss’ (2010)  correlation, for the U.S., these reforms and deregulation in the 1990s led to financial failures and a recession. These were followed by greater inequality. The top 20 percent experienced a rise in their incomes thereby increasing the Poor to Rich (P/R) ratio from 42.6 to 53.5 % from 1993 – 2002 and extending the income inequality between groups as the gini recorded a movement from 0.357 to 0.483 in 2002. 

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