Neoliberalism imposes a colonial-like control on developing and underdeveloped countries through financial liberalization and associated financialization. Developing countries were told to believe that financial liberalization was vital for them to attract external capital and that it would be essential to finance economic development. The International Monetary Fund (IMF) and the World Bank have always been actively pushing for financial liberalization in developing countries. This internalized the view in policymakers and especially in finance ministers of these countries that financial liberalization was the key to improving the functioning of their financial sectors. It was supposed to be the key factor that would increase profitability and competitiveness in the markets. Media also played a role in pushing and ensuring that these measures garner wide support among elites and middle classes – who have the most political influence in developing countries. It became the cause why many unique features of existing financial structures and policies in developing economies were abolished.
The government debt of developing countries is unjust and unequal, especially considering the fact that the third world plays a vital role in securing the assets of the creditors from the developed countries and ends up leaving the people in poor countries to carry the cost of adjustment and repayment. These are just some of the aspects of global markets that contribute to the several ways through which neoliberal globalization has only worsened the relative position of third-world countries and hampered their development projects. Under colonialism, political control was evident while what neoliberalism does is multiplies the colonial-style economic relations between different countries. So, even though the contemporary structures of imperialist political control are not as at the forefront as those of direct colonial control, they still function in the same way in order to enforce global inequality, global division of labor, and imperialist exploitation of resources.
Financial liberalization, a quintessential component of neoliberalism, decreases developing countries’ domestic policy autonomy to almost zero. Increased exposure to global financial markets and completely uncontrolled international capital flows make it impossible for a country to control the number of inflows and outflows. It creates undesirable consequences. Sudden flooding of foreign portfolio investment by international investors into a country can cause the national currency to appreciate. Therefore, this has created a new problem similar to the “Dutch disease”.
An appreciation of the currency caused by the capital inflows also appreciates the real exchange rate, altering the economy of the country. The governments are then forced to adopt deflationary fiscal policies that decrease demand and can even lead to negative economic growth to appease financial interests. Since trade liberalization is an element of financial liberalization, it causes these countries to have reduced indirect tax revenue. It then creates pressure to limit other taxes, slowing down the economic growth rate. Consequently, imposing limits on government spending. Therefore, financial liberalization not only reduces the third-world countries’ ability to make policies that would increase spending by increasing demand during low economic growth but, also decreases their ability to make policies focused on the developmental and growth-oriented activities of the state.
The neoliberal developmental agenda has been constantly being promoted by multilateral financial institutions regardless of its negative impacts. Multilateral financial institutions like the International Monetary Fund (IMF) and the World Bank promote this agenda by imposing structural adjustment programs (SAPs) on Third World Countries. Submission to this package has become a condition for developing and underdeveloped countries for receiving external funds, loans, and other financial assistance from not only these institutions but also from most of the other private or bilateral lending sources. These institutions remain tightly associated with the interests of the western powers, especially the USA, despite their role and scope of being an independent structure. Analysts say that according to ideological and geographical considerations of the USA and other Western contributors, both the IMF and the World Bank have been subject to constant interference from those countries. It is evident in the inconsistency in the dealings of these institutions with a bunch of Third World countries that can only be comprehended as ideological differences and major play of power interests.
In the 1980s, lending was either reduced or completely denied to countries like Cuba, Vietnam, Mozambique, and Nicaragua that were at odds with the US foreign policy. Whereas lending with countries like Chile, Guatemala, and El Salvador was either maintained or increased as it aligned with US interests, even though these countries had charges of persistent human rights abuses, corruption, and other dubious practices. These inconsistencies in the lending record charged one analyst to conclude that World Bank’s policies are ‘highly conditioned by the dominant political agenda of the US administration and that this has co-opted the scientific agenda and transformed it into a manipulative exercise’. In severely polarized societies, the interests of the majority are usually not served by such elitist arrangements.
Furthermore, the imposition of conditionalities on lending almost always entails a reduction in sovereignty and restricts the ability of third-world countries’ governments to determine policies and be able to shape development in their societies according to their unique contexts, values, traditions, and aspirations.
Neoliberalism constructs a totalizing view of society and attempts to provide a rational basis for understanding all aspects of development while neglecting much of the richness and diversity of development by reducing it to a singular ultimate essence. This is exactly why it becomes prone to problems of reduction bias, whereby simple monocausal answers and explanations are pursued in complex developmental realities. It excludes and leaves little to no room for much of the richness and diversity of societies that produce different paths of development. Financialization has been now marked not only in economics but also in many developing countries.
The diversity of financial structures that were suited and curated according to the specific national context and to the advancement of the economic development objectives by the newly independent developing countries in the mid-20th century has been undermined by financial deregulation. This notion that the neoliberal framework brings forth that only one body of theory is universally applicable. It neither reflects the diverse realities of the third world markets nor does it form a logical basis for comparative study of the third world states as they exist in practice. Many societies comprise vastly askew power relations and structural inequalities that are very far off from the reality and ideal types of neoliberal theory. Hence, different development policies may work in different ways in different places at different times under different contexts. Different development problems of particular countries and regions cannot be solved by universal answers and because of this, classic market-based solutions that the neoliberals have provided are unlikely to succeed in most third-world countries.
