Strengths and weaknesses of the neo-liberal approach to development

Essay 2011 10 Pages

Business economics - Economic Policy



1 . Introduction

2. Emergence and evolution of neoliberalism

3. Strengths and weaknesses of neoliberalism
3.1 Strengths
3.2 Weaknesses

4. Conclusion

1. Introduction

The history of development over the last century has been one of competing theories and developmental models. From time to time certain models dominated the theoretical and practical agenda. These models of development had – and still have - their own advantages and disadvantages, advocates and opponents, strengths and weaknesses. Neo-liberalism is one of the models that was studied most deeply in terms of its positive and negative impacts on development generally and on the state role specifically.

Since the 1970s neoliberal approach was widely applied in different countries around the world, including developing and developed countries with the assistance of the International Financial Institutions (IFI) that evidently advocate for neoliberalism in developing countries. Therefore, strong debates on the efficiency and validity of this approach were developed (Greig et al., 2007).

This paper will discuss neoliberalism as one of the development models. It attempts to highlight the strengths and weaknesses of the neoliberal approach to development. It will start by reviewing the emergence and evolution of neoliberalism. Then, some of the strengths and weaknesses of neoliberalism will be presented. Chilean and Egyptian case studies will be briefly highlighted in order to illustrate the strengths and weaknesses of neoliberalism. Finally, the conclusion will be presented.

2. Emergence and evolution of neoliberalism

Neoliberalism, as a global approach to development, dominated global development literature and practice from the 1970s. It emerged mainly to enhance growth, create free markets, replace the Keynesianism that proved to be weak, and eliminate the intervention of the state in the economy that resulted in poor economic performance in many countries (Harrison, 2005). The prevalence of neoliberal approaches around the world was supported by IFIs such as the World Bank (WB) and International Monetary Fund (IMF), which could be considered the main institutions advocating neoliberalism. By the 1980s, the job of the IMF had extended from observing and managing the stabilization of global finance to assisting governments to recover from economic defects or financial instability. The WB’s role also developed over time as it was mainly initially concerned with providing WWII torn-countries with needed finance for reconstruction. After this, additional institutions were added to the WB group, such as International Development Associations (IDA) and International Financial Corporation (IFC), to expand WB activities to include supporting developing countries. In 1973 the oil crisis created by OPEC countries through increasing the price of oil resulted in surpluses for OPEC countries’ funds, which in turn kept the money in the private banks in developed countries. These banks started to offer loans to poor countries that were suffering from the oil price escalation, but they failed to pay back either the loan or the interest. As a result, the IMF interfered to help solve the economic crisis in the developing countries, and this was a suitable time for the IMF to introduce so-called conditionality for obtaining loans (Greig et al., 2007). This conditionality was associated with the implementation of the “Structural Adjustment Programs” that are mainly structured based on the “Washington Consensus Agenda”. It could be said that the prevalence of neoliberalism is because of the widespread implementation of “Washington Consensus” economic reforms in developing countries in 1980s and 1990s with the support of IMF and WB, which set adopting “Washington Consensus” reforms as a condition for borrowing money (Payne and Philips, 2010; Greig et al., 2007). The Washington Consensus consists of ten reform policies, including: “fiscal discipline, public expenditure priorities, tax reform, interest rates, exchange rate, trade liberalization, foreign direct investment, privatization, deregulation and property rights” (Williamson, 1990).

3. Strengths and weaknesses of neoliberalism

3.1 Strengths

The collapse of Soviet Union communism and the obvious weakness of the intervention of the state in developing countries were good circumstances to highlight the strengths of neoliberalism. It was believed that the free market approach would significantly contribute to economic growth, which in turn would help with poverty reduction and the increase of liberty. It was noticed that neoliberal reforms could achieve very high economic growth compared with other approaches. However, it is argued that because of neoliberalism the distribution of the income between rich and poor is still unequal and widens the disparities between rich and poor (Greig et al., 2007).


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Title: Strengths and weaknesses of the neo-liberal approach to development