Neoliberalism and the Welfare State: Is the competitiveness of states a dangerous obsession in the context of globalization?

The development of the modern world is characterized by the growing international economic and political cooperation (Cerny, 1997). In fact, the process of globalization has already become the mainstream trend in the development of the world’s economy and politics. In such a situation, many countries of the world focus their efforts on the elimination of fiscal barriers and develop free trade in order to stimulate the economic growth and improve their position in the world. At the same time, Neoliberalism becomes one of the major theories on the ground of which states develop their economic and political strategies. In this respect, it should be said that Neoliberalism traditionally aims at the ongoing liberalization of the economy, which is supposed to increase the competitive potential of a country in the world market.

However, such a trend may be quite dangerous between the growing competition between countries applying neoliberal policies leads to the emergence of conflicts between countries and they simply struggle for survival on the global terms. Therefore, it is possible to reveal certain contradiction in the development of neoliberal policies and the process of globalization, since, on the one hand, countries attempt to increase their competitive potential, while, on the other hand, they attempt to integrate their economic and political cooperation. In this respect, it is important to lay emphasis on the fact that globalization has always brought controversial outcomes and it was not always beneficial to all countries. In other words, globalization, does not necessarily mean the well-being for all countries. Instead, globalization should be rather viewed as the manifestation of neoliberal policies and their outcome since the economic integration, in terms of globalization, implies the elimination of barriers between countries, while neoliberal policies is the most effective way for countries to take the larger share of the world market and improve their position in the competitive struggle. Otherwise, they can hardly compete effectively that means the gradual degradation and transformation of countries, which cannot afford the competition in the globalized economy, into outcasts.

The background of Neoliberalism

The emergence of Neoliberalism is considered to be a relatively new trend, but the roots of Neoliberalism can be traced back to the past centuries, when liberal ideas have just started to appear. In fact, Neoliberalism is grounded on Liberalism and the modern Neoliberal ideas have emerged in the result of the constant opposition between two contrasting views on the development of the political and economic life of countries. On the one hand, some specialists (Schwartz, 2000) stand on the ground that the role of the state in the regulation of the national economy should increase. For instance, Keynesians believe that the state should strengthen its control and regulate macroeconomic development to avoid economic crisis. On the other hand, there are neoliberals, who stand on the ground that the state regulation slows down the economic development of the national economy and prevent it from fast progress (Van der Borght, 2000). In order to understand the essence of this antagonism, it is important to refer to the past and to ideas, which laid the foundation to modern policies, including Neoliberalism.

In this respect, it is possible to refer to Foucault, whose works influenced substantially the development of the modern politics and economy. Foucault understood neoliberal technologies of government as a transformation of the social rather than its end. The concept of governmentality allows to call attention to the “constitution of new political forms and levels of the state such as the introduction of systems of negotiation, mechanisms of self-organization, and empowerment strategies [O]n the basis of the concept of governmentality, it can also be shown that privatization and deregulation do not follow economic imperatives so much as political strategies” (Dunning, 1998, p.168).

In fact, it is important to lay emphasis on the fact that Neoliberalism emerged on the ground of liberalism and profound changes that took place in the society in the second half of the 20th century when traditional economic and political theories did not work as effectively as they used to be in the past. The concept of Neoliberalism mirrored the profound changes in the socioeconomic life of the society and mainstream trends which defined the development of the world’s economy. At this point, it is worth mentioning the process of globalization which encouraged the development of neoliberal policies and without which globalization could hardly be as successful as it is now. It proves beyond a doubt that the major ideas of Neoliberalism are of the utmost importance for the process of globalization (Hay, 1998). For instance, the idea of the open market economy and liberal economic relations are crucial for the process of globalization because the introduction of any protectionist policies leads to the emergence of artificial barriers which prevent countries from effective economic cooperation at the international level.

At the same time, Neoliberalism contradicts to major principles of the Keynesian theory, which stood on the ground of the strict state regulation of major macroeconomic processes. In fact, the Keynesian theory used to be very popular, especially in the post-war era in the 1950s-1970s, but the mid-1970s revealed the fact that the state regulation is not always effective, while in the 1980s even such conservative states as the UK have started to implement neoliberal policies. In terms of these policies, the state distanced from the regulation or overregulation of the national economy, launching a large-scale privatization, minimization of fiscal pressure, stimulation of free trade and business development (Jessop, 1994). As a result, the free market principles became determinant in the development of national economies of countries which implemented neoliberal policies. Consequently, markets and national economies were practically self-regulated with the minimal interference of the state. In fact, in terms of neoliberal policies, the state tends to the deregulation and distancing from business and economic processes, focusing only on vitally important issues.

However, such a separation of the state and business raised the problem of the relevance of the concept of welfare state, which was crucial in the mid-20th century. To put it more precisely, the Great Depression and profound economic crisis in the 1920s-1930s forced the government of many countries to introduce regulatory policies to balance the redistribution of wealth within a nation. At this point, Keynesian ideas proved to be particularly useful since the concept of the welfare state implied the social protection of the population which was guaranteed by the state. In such a way, governments attempted to cope with the poverty and widening gap between the rich and the poor which threatened to social unrest and revolts. In other words, the growing disparity could provoke the change of the existing social order by revolutionary means. In such a context, governments were forced to introduce regulatory policies to redistribute the national wealth and support the most deprived layers of the society in order to avoid their active protests and revolts (Weiss, 1998). To meet this goal Keynesian ideas of the macroeconomic regulation and stabilization were used. The state used its monetary and fiscal policies to redistribute wealth and maintain social stability.

However, the introduction of neoliberal policies have minimized the state regulation of the national economy that led to the emergence of neoliberal economy, while the concept of the welfare state has become irrelevant because the state could not redistribute wealth effectively and the socioeconomic disparity between the rich and the poor has started to grow again. Today, neoliberal policies reveal the fact that they lead to the uncontrollable development of business where social responsibility of business and state are inferior compared to economic benefits business and the state can get from the economic growth and development of free trade. However, such practices resulted in the current economic recession which forces many governments to return to the concept of the welfare state and state regulation of economy.

In such a situation, the emergence of Neoliberalism is the major movement which tends to minimize the role of the government in the regulation of the economy. As a result, the economy gets ample opportunities for “self-management”, which meets basic principles of the open market economy. At this point, it is worth mentioning the fact that the open market economy is accepted by the majority of countries as the most effective economic system. At the same time, the introduction of the open market economy principles on the international level naturally accelerates the process of globalization, increases the economic cooperation between countries due to the liberation of capital movement, human capital movement, elimination of fiscal barriers and development of free trade. The economic liberalization naturally leads to the political one that stimulates countries to closer cooperation not only in economic sphere but also in political sphere, military cooperation, culture, etc. (Hirst and Thompson, 1998) As a result, Neoliberalism has proved to be able to accelerate the economic and political cooperation between countries and, thus, stimulate the process of globalization.

The impact of Neoliberalism on the world’s economy

In such a context, it is important to dwell upon effects of Neoliberalism on the economy of countries as well as on the process of globalization at large. At the same time, it is important to understand what effects of Neoliberalism and globalization are for countries. It is obvious that Neoliberalism, which actually encourages globalization, can have both positive and negative effects (Gill, 1993). Therefore, it is necessary to define whether benefits of Neoliberalism and globalization can outweigh their costs. Moreover, the question arises: whether Neoliberalism can keep globalization progressing or probably it will undermine globalization because of the growing competition between countries, which may provoke anti-globalist policies to protect national economies and increase their competitive power.

a. Economic growth

Today, the process of globalization is viewed as an important factor that stimulates the economic growth of countries. In this respect, it should be said that the process of globalization contributes to the growth of economic cooperation due to opening new markets and closer interaction between countries (Boyer and Drache, 1996). What is meant here is the fact that the elimination of fiscal barriers between countries allows them to increase export-import operations without consistent financial losses. In such a situation, many countries, especially in Asia, such as Japan, China, South Korea, and others focused on export industries, which became accelerators of their economic development. Today, many countries follow the lead of successful Asian economies, which benefited from the globalization since the growing export contributed to the consistent economic growth of these countries. In such a context, globalization turns out to be crucial for countries, which are mainly oriented on foreign markets.

Neoliberalism contributes to the deregulation of the national economy which allows companies to develop faster and more effectively, while the lack of regulation on the domestic level facilitates their expansion policies on the international level. In such a way, neoliberal policies encourage companies to develop their business internationally since the state does not impose any significant restrictions on their operations.

However, the effects of globalization are not always possible and economic growth is not always traced in all countries. In fact, some countries tend to deteriorate their economic performance and suffer from the gradual or rapid decline of their economies because they cannot afford competition with leading countries of the world and multinational corporations, which penetrate easily new markets. In such a context, globalization becomes a major threat to weak economies, which cannot compete effectively (Krugman, 1994).

There is a huge discrepancy between the measurable result of economic globalization and its proposed benefits. Neoliberal policies have unarguably generated massive wealth for some people, but most crucially, they have been unable to benefit those living in extreme poverty who are most in need of financial aid (Watson and Hay, 2003). Excluding China, annual economic growth in developing countries between 1960 and 1980 was 3.2%. This dropped drastically between 1980 and 2000 to a mere 0.7 %. This second period is when neoliberalism was most prevalent in global economic policy. Interestingly, China was not following the neoliberal model during these periods, and its economic growth per capita grew to over 8% between 1980 and 2000 (Van der Borght, 2000).

In such a context, the impact of Neoliberalism on the economic growth of developing countries is rather negative than positive effects. In this respect, it is important to understand that Neoliberalism strengthens the competition between countries, while national economies of developing countries are too weak to compete effectively with economies of developed countries, which have already outpaced developing countries consistently. Hence, they can benefit from globalization and Neoliberalism is apparently good for developed countries since it improves the position of their companies on the global market. At the same time, developing countries following the lead of neoliberal policies in developed countries turn out to be trapped by the efficiency of neoliberal policies in countries with a strong competitive power and the low competitive power of their own economies.

Over the last 25 years, the income inequalities have increased dramatically, both within and between countries (Piven, 1995). Between 1980 and 1998, the income of richest 10% as share of poorest 10% became 19% more unequal; and the income of richest 1% as share of poorest 1% became 77% more unequal (Gomory, 2002).

“Since 1846 the United States has carried out no fewer than 50 military invasions and destabilizing operations involving 12 different Latin American countries. Yet, none of these countries has ever had the capacity to threaten US security in any significant way.  The US intervened because of perceived threats to its economic control and expansion.  For this reason it has also supported some of the region’s most vicious dictators such as Batista, Somoza, Trujillo, and Pinochet.” (Gomory, 2002).

Hence, it is obvious that the national economies of developing countries turn out to be in a disadvantageous position compared to developed countries. The economic growth in developed countries is accelerated or, at least, remains steady, while developing countries stumble permanently and cannot maximize their economic growth substantially through introduction of neoliberal policies. However, it is obvious that it is developing countries which need the fast economic growth the most, because it is the only way to catch up with the most developed countries of the world.

Economic growth, as measured in GDP, is the yardstick of economic globalization which is fiercely pursued by multinationals and countries alike. It is the commercial activity of the tiny portion of multinational corporations that drives economic growth in industrialized nations.

Two hundred corporations account for a third of global economic growth. Corporate trade currently accounts for over 50% of global economic growth and as much as 75% of GDP in the EU. The proportion of trade to GDP continues to grow, highlighting the belief that economic growth is the only way to prosper a country and reduce poverty (Dunning, 1998).

In such a context, it is obvious that whilst economic growth clearly does have benefits, the evidence strongly suggests that these benefits do not trickle down to the 986 million people living in extreme poverty, representing 18 percent of the world population (Dunning, 1998). For these people Neoliberalism does not bring positive effects since the poorest countries are unable to ensure fast economic growth in the globalized economy, when they introduce liberal policies. Instead, developed countries maximize their benefits from the process of globalization and liberal policies turn out to be quite effective for them (Hay, 1998).

In Europe only 5% of EU citizens work in agriculture, generating just 1.6% of EU GDP compared to more than 50% of citizens in developing countries. However, the European Common Agricultural Policy (CAP) provides subsidies to EU farmers to the tune of £30 billion, 80% of which goes to only 20% of farmers to guarantee their viability, however inefficient this may be (Van der Borght, 2000).

b. Free trade

The growing disparity between developed and developing countries in the result of the implementation of neoliberal policies and globalization can be explained by the growing competition between countries. In this respect, it is important to lay emphasis on the fact that traditionally, developing as well as developed states could protect their economies from foreign expansion by means of introduction of fiscal barriers or quotas which could limit the access of foreign products to the domestic market. In such a way, it was an obvious interference of the state into economic development of a country. Such policies contradicted to basic principles of Neoliberalism, which, in contrast, encouraged the non-interference of the state into the economic development.

In fact, neoliberal policies contributed to the encouragement of free trade between states, which, though, proved to be quite dangerous for developing countries because free trade made them vulnerable to the expansion of foreign companies. In actuality, this means that free trade implies that countries cannot use strict fiscal policies to restrict the access of foreign goods to domestic markets. As a result, those companies and countries which are able to supply goods of a higher quality and at a lower price are in an advantageous position. In this respect, developing countries could not trade effectively with developed countries because they were and still are focused on the export of natural resources or, at most, they have only one major industry that ensures a considerable part of the GDP growth of developing countries. In such a context, the development of free trade, which naturally results from the introduction of neoliberal policies and development of globalization, has a dubious effect on developing countries. On one hand, they can stimulate the economic growth due to the fast development of the main industry which provides the growth of the GDP, for instance, export of natural resources, such as oil, gas, etc. On the other hand, the development of free trade makes developing countries highly dependent on the situation on international markets. In such a situation, the decrease of demand on certain products, which constitute the basis of the national economy of a developing country, leads to the consistent deterioration of the economic situation and decrease of the GDP rate. Obviously, the competitive position of developing countries depends on the situation on the global market and neoliberal policies strengthen such dependence because they stimulate free trade and competition between countries. In such a situation, many developing countries view Neoliberalism as the only way to accelerate their economic development because they count for free trade, which opens larger opportunities for export of products to other countries. As a result, both developing and developed countries participate in international trade agreements to encourage free trade.

The General Agreement on Trade and Services (GATS) was agreed at the World Trade Organization (WTO) in 1994. Its aim is to remove any restrictions and internal government regulations that are considered to be “barriers to trade”. The agreement effectively abolishes a government’s sovereign right to regulate subsidies and provide essential national services on behalf of its citizens. The Trade Related agreement on International Property Rights (TRIPS) forces developing countries to extend property rights to seeds and plant varieties.

Control over these resources and services are instead granted to corporate interests through the GATS and TRIPS framework (Gomory, 2002).

In actuality, developing countries count to use free trade to maximize their export opportunities and use benefits from export to improve socioeconomic situation and to develop local economy, focusing on different industries to diversify the national economy, which is one of the major goals of developing countries. However, at the moment, developing economies are too weak and too vulnerable to negative trends on the international market. As a result, their economic development is not very effective. In addition, they cannot compete with developed countries in the most prospective industries, which are high tech and knowledge based industries. These industries are particularly profitable and developed countries are leaders in these industries. Therefore, the emergence of free trade opens international markets for leading companies, which are based in developed countries. As a result, neoliberal policies strengthen the position of developed countries because they have competitive advantages over developing countries, which suffer from technological and economic backwardness. In such a situation, the liberalization of economy leads to the openness of the national economy. Thus, foreign companies can enter the domestic market, while free trade agreements prevent local governments from protectionist policies, which actually contradict to neoliberal principles.

c. Liberalization

One of the major characteristics of Neoliberalism is the liberalization of the national economy as well as international economic relations, distancing of the state from the regulation of economy and maximization of business liberty. In fact, such liberalization of economy is an essential condition of the process of globalization. At the same time, liberalization increases competitiveness between countries because there are little opportunities for protectionism in terms of neoliberal policies. The liberalization of economy leads to the weakening of its regulation. However, the deregulation of economy lead to negative effects which make global economy particularly vulnerable to crisis and negative outcomes of the process of globalization become particularly dangerous in deregulated markets.

Global deregulation has created the transnational corporation, as business operations are increasingly moved abroad in the search of cheaper labor, tax incentives and less red tape. In effect, unemployment rises in the affluent countries that lose jobs, while corporations outsource these same jobs to sweatshops in developing countries where wages are relatively insignificant, employment standards are often irrelevant and there are very low environmental standards. Thus corporations increase their profits. In order to win back these corporations and create more jobs, the US and other countries also lower their standards and cut regulation. Thus the logical conclusion of liberalization and deregulation is a race to the bottom, where the lowest possible standards are sought after and legislated for globally, with little regard for individual workers, employment conditions, the community or the environment.

Deregulation also encourages monopolization. Corporations, whilst falsely quoting the free market and open competition that Adam Smith envisaged, form virtual monopolies through acquisitions and mergers. This allows them to manage competition through strategic alliances that exist between all major players. As such, an estimated 60% of US GDP is provided by the largest 1000 corporations, and the remaining 11 million companies account for the other 40% of GDP (Van der Borght, 2000).

In this respect, it is important to lay emphasis on the fact that the monopolization, as one of the outcomes of deregulation, is extremely dangerous not only for developing but also for developed countries. Moreover, today, monopolization is an international problem because multinational corporations tend to monopolize certain markets. As a result, governments implementing neoliberal policies turn out to be unable to resist to the impact of multinational corporations and their expansion on the domestic market, which can be disastrous for local smaller and medium business. In response to the strengthening of monopolies and multinational corporations, governments of many countries attempt to untie their efforts through the formation of international organizations, such as WTO, which developed clear rules.

But, as the matter of fact, such organizations fail to perform effectively regulatory functions which used to be attributed to the state, before the implementation of neoliberal policies.

Neoliberalism as a grave digger to the welfare state

In fact, the deregulation as well as neoliberal policies at large leads to the emergence of a number of problems which both developing and developed states need to solve, but, as long as neoliberal policies are implemented, they can hardly tackle these problems. To put it more precisely, the strengthening of multinational corporations, monopolization, the dependence of national economies on international markets, and other problems derive from the neoliberal policies which negative effects are multiplied in the context of globalization. In fact, globalization increases the risk of all problems provoked by Neoliberalism because countries grow more and more integrated and they cannot stop neoliberal policies and introduce restrictive, regulatory policies at once without significant harm to the national economy. For instance, if a state imposes high taxes on export or import, such a policy would evoke the opposition from the part of other countries, increase pressure from the part of multinational corporations and put the country under a threat of economic isolation and sanctions in response from the part of other states. In addition, the limitation of export or import can misbalance the national economy in the context of globalization that will put the country into a disadvantageous competitive position (Jessop, 1994a). As a result, a single state can hardly change radically its neoliberal policies in the epoch of globalization.

As a result, many states attempt to continue neoliberal policies because they expect to outpace other states and to take the leading position which implies consistent benefits in the globalized economy. In such a situation, many states tend to liberalize and deregulate strategically important spheres, such as education. The US education system is valued at around £800 billion, and it is estimated that 10% of this will be in corporate hands within the next 8 years. In the UK, 59 learning academies are replacing existing schools, most under direct sponsorship from the corporate community who provide substantial donations to the government (Hirst and Thompson, 2000). All these academies “give sponsors and governors broader scope and responsibility for ethos, strategic direction and challenge”. As a result, they have a substantial emphasis on business, enterprise and commerce, and are not accountable to the public in the same manner as ordinary schools.

This is just one example of the corporate takeover of public services in the UK as part of the Private Finance Initiative (PFI). Government spin has ensured that the PFI is never referred to as privatization, although it plainly hands over substantial control of public services and resources in exchange for corporate financial aid (Gomory, 2002).

Furthermore, it is also worth mentioning that the UK, for example, is currently experiencing legal restrictions on public water usage, whilst the operators, Thames Water, waste 894 million litres a day through unfixed leaks alone. The company avoided regulatory penalties whilst announcing a 31% rise in pre-tax profits which totalled £346.5m. Water bills are expected to increase on average by 24% by 2010. This case highlights another point ”“ corporations will not reinvest their profits in order to address a crisis. State owned suppliers on the other hand can reinvest profits to quickly improve standards (Dunning, 1998).

This raises the question: ”˜how can corporations profit from those who have little or no money to spend?’ Impoverished communities all over the world cannot afford to pay for water services; many live on less that 1 dollar a day. Almost one-fifth of the planet’s population lacks access to safe drinking water and 40 per cent lack access to basic sanitation. It is not profitable for a corporation to control water distribution in areas of deprivation; they have little incentive to supply to those most in need if they cannot pay for the service. Publicly owned and managed water facilities, with their primary focus on meeting welfare needs and not profit, is best placed to undertake this service (Van der Borght, 2000).

In such a way, the state, even in the most developed countries of the world, is losing control over the economic and social development because of neoliberal policies being implemented. However, as it has been already mentioned above, these policies cannot be eliminated immediately by a single state because of the process of globalization which makes states and economies interdependent. Hence, neoliberal policies can extremely dangerous in the context of globalized economy. In order to avoid negative effects of Neoliberalism states need to unite their efforts and develop common strategies, which can help them overcome difficulties and problems raised by neoliberal policies. In this respect, it is important to understand that even if some states decide to refuse from neoliberal policies, they will need the support of their partners. In other words, they need the development of mutual policies to avoid negative effects of Neoliberalism.

In such a context, it is possible to refer to the example of China which has not introduced neoliberal policies and has always been concerned with the regulation of the national economy. In fact, this country turns out to be an exception since it is one of the most successful countries that ensure the GDP growth and stable economic development without the use of neoliberal policies. However, even China needs to liberalize its economy and it attempts to attract foreign investments to improve its position in the world market even more. In addition, China also needs the participation in such international organizations as the WTO in order to maintain its competitive position, but the participation in the WTO naturally forces China to shift from its protectionist policies toward neoliberal ones.

As a result, Neoliberalism becomes the mainstream trend in the world economy and globalization increases risks and threats which Neoliberalism can raise. In this respect, one of the major problems is the inability of the state to influence policies of large corporations, which only goal is the maximization of their profits. In such a context, it is hardly possible to speak about any effective social policies while the concept of the welfare state seems to be out of date. In actuality, neoliberal policies lead to the formation of absolutely new socioeconomic relations, where large multinational corporations rule, while the role of the state, which is originally supposed to stand for interests of ordinary citizens, becomes secondary. Nevertheless, the overwhelming majority of states keep stubbornly implementing neoliberal policies, in spite of interests of citizens, especially the poor, who are particularly vulnerable to negative impact of Neoliberalism in the context of globalization.


Thus, taking into account all above mentioned, it is possible to conclude that the development of the process of globalization is encouraged by Neoliberalism. At the same time, Neoliberalism contributes to the growing disparity between rich and poor nations. Moreover, Neoliberalism raises numerous problems within both rich and poor states because the role of the state decreases dramatically, while the role of business, especially large multinational corporations increases substantially. In fact, it is large multinational corporations that benefit the most from the emergence of Neoliberalism in the context of globalization. In such a context, there remains no room for the welfare state, where social protection could be the priority, because, today, Neoliberalism encourages the development of a totally different socioeconomic system where maximization of profits of large companies is prior to interests of people.

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