Don’t Believe the Hype: Neoliberalism Has Failed Pakistan

Recent slum clearance in Islamabad

By Danish Khan

The processes of economic development across different countries and different times are uneven, multi-faceted, and even counteracting. In recent history, as the global South industrialized and urbanized, manufacturing jobs moved from the global North to the global South. But such structural changes to the global economy didn’t just happen; they were cajoled by a policy package that included policies of free trade, deregulation of financial markets, de-unionization of the work place and a reduction of the state’s role in an economy.  When advocates of these neoliberal policies are confronted in the US about the dismal outcome(s) of their prescribed policies (see: the Rust Belt), they argue that these policies are helping the world’s poor by generating employment in developing countries. If neoliberal policies are simply transferring jobs from the developed world to the developing world, their argument goes, these policies would be regarded as progressive and redistributive. Who, with an eye to global equity between rich and poor countries, could oppose such policies?

While it is true that jobs did move from the global North to the global South, this relocation has not resulted in the reduction of global poverty, but in the exacerbation of it. The fact is that if we discount Chinese economy from the countries of global South (and there is good reason to do this, as the Chinese model of development is anything but neoliberal), then poverty eradication claims of international financial institutions and neoliberal defenders simply vanish away. Moreover, in recent decades, countries which have taken an opposite route from the neoliberal route have done better on the front of poverty alleviation and inequality, such as Bolivia, Ecuador and Venezuela. In south Asia, advocates of neoliberalism looked to the growth of the Indian economy, which had been quite rapid since the neoliberal ‘reforms’. But again, India’s performance on reducing poverty and inequality is anything but satisfactory. Neoliberalism has seen a few get rich while poverty and insecurity have expanded.

Although there exists a well-established relationship that shows that neoliberal reforms create higher inequality in societies, the impact of overall economic growth and other development indicators of these policies is much more contested. The argumentation of neoliberal defenders is that inequality is ok, as long as everyone is improving – the old ‘rising tide lifts all boats’ argument. Here, we must give credit to the advocates of neoliberal policies who have vehemently propagated ‘success’ stories of neoliberalism which are rare, and steered attention away from the cases which failed.

Pakistan is an unsuccessful case, and is barely mentioned in this context, so it’s worth going over the very basic statistics of Pakistani economy to make a claim that neoliberal policies by no means guarantee rapid economic growth. Neoliberal policies were enacted in 1989 under the tutelage of structural adjustment program on the diktats of international financial institutions. Thereafter, every successive government in Pakistan operated within the box of neoliberal policy framework, irrespective of civil-military or political party distinctions. Therefore, we can divide Pakistan’s economic experiences into two periods: pre-neoliberal and neoliberal. The pre-neoliberal period was the period of active state regulation and intervention in the economy. The World Bank has data on Pakistan from 1960 onwards. So we can categorize the period from 1960-1988 as a pre-neoliberal era (regulated capitalism) and the period from 1989-2013 as a neoliberal era (neoliberal capitalism).

According to World Bank data, gross domestic product (GDP) growth was 6.2 percent per year on average from 1961-1988. In the neoliberal period (1989-2013) average rate of GDP growth was 4.1 percent per year. The difference is even starker when we consider per capita GDP growth (thus taking into account population growth); in pre-neoliberal period, average per capita GDP growth was 3.1 percent annually and in neoliberal period it was 1.8 percent per year.

This empirical evidence nullifies the most celebrated claim of the neoliberal policy makers in Pakistan, i.e. the economy grows faster under neoliberal regimes. Of course, multiple factors can be behind the discrepancies between growth rates of two eras, but the central point is that the claimed ‘superiority’ of neoliberal policies cannot be supported by neoliberal experiences of the Pakistani economy. In the case of Pakistan, the supposed superiority of neoliberal policies is an ideologically driven claim which doesn’t have any higher ‘objectivity’ or ‘scientific’ superiority vis-à-vis policies which preceded them.

The theoretical rationale behind neoliberal policies is based on the following proposition: if market forces are allowed to operate freely, they will produce the best outcomes for everyone in society. It is argued that because the state is influenced by different political-economic interest groups and that therefore the state would intrinsically provide rent-seeking opportunities to some interests groups if it is directly involved in the economy. Consequently, the overall efficiency of the system declines. Therefore, in order to improve efficiency, economy should remain ‘autonomous’ from politics. Consequently, policy makers inspired from neoliberal doctrine prescribe governments to stop interfering in the economy and let market forces to their own devices.

What the neoliberal theoretical framework ignores is the fact that a society like Pakistan is highly unequal in terms of wealth/income distribution, gender relations and caste differentiations. As a consequence, when the state does not steer the direction of development, then market forces simply reproduce and reinforce existing realities of Pakistani society, i.e. intensified socio-economic inequalities. This not only has a detrimental impact on the socio-economic dynamics of Pakistani society, but higher inequities also impose a major constraint on the prospects of rapid growth and sustainable economic development.

It is also important to recognize the fact that processes of economic development generate conflict in society. For example, urbanization or industrialization may require deforestation which may not be favorably viewed by some groups of society while others may deem it necessary and inevitable for welfare of the society. Similarly, processes of development may give birth to new elites who might pose a challenge to the hegemony of old elites. Therefore, the role of the state is not only central but it is also quintessential in reconciling at least some of these embedded conflicts that are generated by the processes of development.

The economy cannot, and should not, be analyzed as a separate and isolated sphere immune from politics, institutions and social classes. Therefore, the central proposition of neoliberal policies which divorces the state from the economy cannot be treated as a serious developmental strategy. Contrary to the claims of neoliberal movers and shakers, neoliberal policies hurt poor and working people in all parts of the globe, including the developed and the developing world.