The policy nature and roles in responding to economic issues in Latin America
Supporters of neoliberalism argue that the policy maximizes market scope and promotes the economic efficiency in the developing nations like the Latin America. The policy is praised for facilitating domestic equilibrium, boost economic growth and foster the international market convergence. And although at a higher cost, the neoliberal policies are said to efficiently eliminate high inflation levels which has continued to threaten the developing nation’s markets. It is also believed that most of the Latin American nations adopted the neoliberal reforms between 1980s and 1990s following the constant debt crisis that they were facing (Edwards, 1995).
Neoliberal policies are mainly broad and they involve macroeconomic reforms which seek to improve the various economic trends in a country. For instance the policies advocate for an increased government spending in the key sectors of the economy such as primary education, health care and infrastructure. This is done through the use of fiscal policy tool. However, the spending should be closely monitored to ensure that the government does not operate under a large and constant deficit which triggers inflation and low productivity in the economy. Only in rare circumstances that the government should seek to increase its deficit level, otherwise it should operate within its budget. The deficit should always be maintained at a minimum level. The governments are also encouraged to expand their tax base, by designing more innovative and efficient ways of raising revenues. This will significantly ensure more revenue collection which will sustain the government expenditure.
Neoliberal policies advocate the use of floating exchange rate which encourages foreign investors and moderate interest rates. This strategy is said to be effective as it enhances the control of demand inflation and therefore attract capital flows, which consequently improves the balance of payment in a country. Additionally, the condition enhances the financial market demand for government bonds and other public securities which betters the market. And although interest rates are higher under the neoliberal economy, it offers incentives to the foreign and domestic savers and thus boosts the investment capital. Since the policy advocates for a liberalized trade, nations are supposed to eliminate the quantitative restrictions. They are also expected to adopt relatively low and uniform tariffs which encourage competition and long term economic growth. The policy discourages economic regulations which impede the operations of the market. Instead, it advocates for a deregulated market with a free entry and free exit, except in the sensitive sectors such as national security and other areas necessary for the consumer protection. Neoliberal policies likewise advocate for the robust of the private sector, since it theorist argues that privatization encourages competition and efficiency in the market.
The neoliberal policies are heavily criticized by the Post-Keynesian and Marxist economists. They argue that creating a liberal economy increases poverty and inequality levels within a nation. Likewise, the critics argues that by encouraging financial liberalization and free mobility of international capital, worsens the domestic financial fragility, which further results in a balance of payment crisis. It undermines the value of the domestic currencies in the developing nations and thus reduces the stability potential of a state.
The high levels of uncertainty and liquidity volatility and preference in the Latin American states is much likely to trigger capital flight despite of the higher interest rate advocated by the neoliberal policies. The capital drainage can therefore reduce the investment funds and consequently impact on the foreign exchange (Calvo, Leiderman & Reinhart, 1993). This will have negative implications on the people’s working conditions in the Latin America.
Neoliberalism is also criticized by the political economists who argue that its assumption on saving and investment increase does not hold. According to them foreign savings cannot amount to domestic savings. Additionally, they argue that the economy does not require prior savings for investment. When the liquidity preference is high, many will not prefer to convert their savings into investment. However, what is required is a long term investment plan which is willing to commit resources that foster economic growth.
For the many nations which adopted neoliberal policies, income inequality and unemployment rose at a considerable rate. This was mostly due to the sale of the state owned enterprises and the downsizing process which were done in their public service. For instance coming to power of president Fujimori of Peru in 1990, and the implementation of the neoliberal reforms caused a significance increase of essential commodities like gasoline, water and electricity (Saad-Filho & Johnston, 2004).
The implementation of neoliberal policies encourages domination of multinational corporations such as the EPZs which operates at very favorable conditions, but continues to exploit their employees with low wages and poor working conditions. The EPZs targets vulnerable workers such as women and children as their terms are not favorable to other job seekers.
The post-Keynesian and Marxist theorists argue that the neoliberal policies are incorrectly laid down and inflexible and thus are too hard to succeed. Considering the fact that the policies were borrowed from the Washington Consensus, they are incompatible with the economic and cultural differences of various nations. Although the policies were intended to improve the economic growth of the developing nations, cultural difference variances can greatly hinder the effectiveness of the policy implementation.
According to them, economic growth should be closely monitored in order to avoid exploitation of people and safeguard the small and medium scale businesses from the multinational corporation. Although the government should work towards liberalizing trade, adequate measures ought to be established to ensure safety of the domestic industries and protection of workers’ rights through trade unions. However, the dominance of democratic rule in the Latin America can barely allow the civilian leaders to return to the autocratic policy measures which were adopted by the leaders in the past. The success of these policies therefore is not possible, even if neoliberal policies at times negatively impacts on the people.