The Case Against the Universal Liberalisation Model for Economic Growth

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For years, policy-makers have used the United Nations’ country classification, based on per capita gross national income, as the measurement of their country’s development. The aspiration to move up the scale assumes that: 1) economic growth is the international standard measurement of development; and 2) the more one produces, the better one’s quality of life will be. The history of political movements and economic policies has witnessed both successful and failed attempts to move up the scale. The countries that have accelerated their economic growth have been celebrated worldwide and the general perception is that the people in these countries now enjoy a more resourceful life. This attitude towards economic growth has created a presumption that pro-growth policies observed in more developed countries and actively promoted by international institutions could be applicable in other developing countries. Can this classification ever be misleading?

Stiglitz, Sen and Fitoussi (2009) criticise the idea that GDP growth translates into better well-being and social welfare. Similar to this argument is Wilkinson and Pickett’s study (2010) on the repercussion of GDP growth for inequality. Alternative measurements have attempted to capture the social aspects of growth to compliment the GDP measure, such as the Human Development Index (HDI) and the Genuine Progress Indicator (GPI). But all these measurements are subject to data and methodological errors. They can paint a broad picture of macroeconomic policy outcomes but fail to detail local development.

In addition to the universal view of development as growth, a very specific perspective on how growth can be achieved has prevailed over the past three decades. Since 1990, developing countries have been under strong pressure to introduce market-oriented reforms in public service sectors as a universal model for economic growth. This process has mainly consisted of attempts at privatisation, but has also included the separation of vertically integrated companies to enable future liberalisation along the lines of the liberalised markets of the global North. This liberalisation is seen as a modernising reform, which is expected to enable countries to achieve economies of scale in production needed for economic and social development.

Since Vietnam’s 1986 reforms, GDP per capita has grown at 5-6% per annum on average, life expectancy has increased, and daily lives have become full of high-tech products and services that none of us could have dreamt of before. The country has moved up from the low-income category to the lower-middle income category. Yet along the race, the country has not been able to equally improve lives of the most vulnerable. In many rural areas, household TVs rarely get switched on because electricity is too expensive. A family of five only uses a 5-litre tub of dirty water for all purposes for the whole day, equivalent to only 3% of that of average same size UK household. All the additional wealth the country had gained had not been transferred to the village; basic living standards could not be any more different between rural and urban areas. When access to fundamental services is not ensured, increased access to capital and goods may seem meaningless.

It is then crucial to think of economic policies as adaptable to different country contexts, rather than suggesting an alternative indicator that ranks or categorises countries across a uniform scale.

The Global Spread of Liberalisation and Its Legitimacy
The period between World War II and the 1970s saw regulatory stability in Western Europe and other OECD countries, which favoured public ownership in public infrastructure services that ensured social justice and addressed the strategic positions of these sectors for economic development (see Van de Walle and Scott 2009). Since the collapse of the Soviet Union and the rebirth of neoliberal policies led by the UK’s Margaret Thatcher and the US’s Ronald Regan, there was a strong argument against government intervention in retail sectors, and later in public infrastructure and services. This was based on a neoclassical model of public services liberalisation. Liberalisation in general consists of several elements including corporatization, unbundling, marketization, competition, deregulation and privatisation. Governments and municipalities usually expect privatisation and liberalisation to attract private investment, which in turn would benefit their own finances as they could use the proceeds of a sale to reduce their debts or deficits.

Starting in 1983 in Chile, an international wave of liberalisation of public services in developing countries was enabled by the strong endorsement of developed donor countries and prescriptive conditionalities imposed in development projects managed by the World Bank and other international financial institutions. Among 172 countries that received loans from the World Bank, more than 90 countries accepted liberalisation of the energy market as a conditionality. The Bank has also increased its lending to healthcare, but continues to promote privatisation and commercialisation in healthcare in developing countries. Yet, this model only focuses on financial aspects (such as fees and insurance for private financing) rather than focusing on growing equal quality treatments. The spread of liberalisation policies in developing countries is associated with the ‘Washington Consensus’, a term coined by John Williamson. The consensus was a one-size-fits-all development model that promoted liberalisation, privatisation and deregulation in developing countries (see Birdsall et al. 2010).

It is gradually becoming clear that liberalisation has not led to improvements in private sector performance. The World Bank’s own evaluation of its efforts in 2009 shows that only a quarter of healthcare privatisation projects in sub-Saharan Africa were successful. An investigation of 184 private clinics and hospitals in Abuja, Nigeria in 2008 revealed inequality in client treatment and poor standard of hygiene as well as involvement in counterfeit drug trading. This process has directly increased workload and changed working conditions for the already-insufficient healthcare labour force. Moreover, private investors are unlikely to find it profitable to invest in distribution networks in underdeveloped regions with only a few households (see Doll and Pachauri 2010). Argentina and India also see prices rising regardless of poor quality of services. Therefore, even after privatisation, governments continue to play a key role in in ensuring adequate service delivery, quality and investment. Governments often end up regulating the services via concessional loans or other purchasing agreements, or through renationalisation when multinational companies abandon the services.

The implicit view of many advocates of liberalisation is that the policy remains the best possible way of organising public infrastructure services, and is only obstructed by ideological motives and vested interests. There is clear evidence of another ideological factor at work, and that is public mistrust of the private sector. The initial waves of privatisation in the 1980s and 1990s attracted widespread public support as a reaction against the experienced inefficiencies, cost and unaccountability of many public sector institutions, especially in former communist countries. But by 2003 the World Bank and others acknowledged that privatisation had become deeply unpopular, observing that there was a decreasing faith in markets as a provider of solutions to infrastructure problems. Few politicians now supported privatisation, which was seen as benefiting the elites and corrupt interests at home and abroad, and as fundamentally unfair, both in conception and execution (see Nellis 2003 and Buresch 2003). By then, private sector interest in energy infrastructure had declined and many multinational companies had withdrawn, due to losses and uncertainty.

State intervention is a part of many successful economic development experiences. In the USA itself, industries rely on ‘cheap and abundant oil’, which is subsidised by 30% of the market price by the Pentagon. Japan rejected the neoliberal doctrines of the US advisers and went on to become the world’s biggest manufacturing and most technologically advanced economy in the 1990s. Even the most famous believers in this doctrine used state intervention: Reagan ‘granted more import relief to US industry’ than former presidents, while Thatcher authorised the same public spending budget as her left-wing predecessors.

Is Creating Markets for Private Participation the Only Answer?
Achieving public benefits from a liberalised system depends on a system of regulation, which is expected to create incentives to make up for the relative lack of pure market mechanisms for competitiveness. As noted earlier, the efficacy of regulation even in Northern countries has been called into question, and the regulation of company behaviour is even harder in developing countries.

The experience of Chile is worth examining. In 1982, during its military dictatorship, it became the first country in the world to introduce unbundling, privatisation and liberalisation. It is generally regarded as a good example of a liberalised system with as good a system of regulation as one can expect. However, the experience shows a stream of problems associated with the inability of regulators to deliver expected benefits. The problem of under-investment gradually became apparent, as the regulatory system effectively “encouraged power firms to postpone or avoid altogether the installation of additional generation capacity”. This led to a serious energy crisis in 1998-99, initially triggered by a drought, whose effects were compounded by technical failures, delays and problems with the coordination and transparency of the private generating companies. The crisis highlighted “the relative weakness of public bodies in dealing with short-term profit-oriented private firms, and the lack of a long-term energy strategy.” The investment problem continued: from 2000 onwards there was very little investment in new capacity, and another energy crisis arose in 2007-09 when the impact of a drought and gas shortages was worsened by the unavailability of three key power plants, leading to a 1000% increase in prices. The government had to spend over one billion dollars to subsidise fuel and electricity prices, and make heavy use of expensive diesel generators. The International Energy Agency’s 2009 report on Chile concluded that the experience of 2007/08 showed that Chile still has real problems with security of supply, and that “the government needs to take a more proactive position with regard to monitoring energy developments and systematic risk assessment”.

Assumed to follow automatically from the operation of the market mechanism centred on profit-seeking firms is the realisation of efficiency gains. However, this widespread belief that the private sector is always more efficient than the public sector is not supported by empirical evidence. This evidence includes a global study in 1995 by Pollitt, which compared dozens of public and private services operators all over the world, and found no significant systematic difference between public and private in terms of efficiency. More recent studies confirm this in the electricity, water and healthcare sector in developing countries. A study of electricity companies in Africa found that levels of efficiency in the region were quite independent of the degree of vertical integration or the presence of a private actor. A more complex study by the World Bank’s privatisation agency, the Public Private Infrastructure Advisory Facility (PPIAF), did find that private infrastructure services companies were more likely to cut jobs, and show productivity gains because of this. However, the study found no evidence of any benefits for the sectors in terms of higher investment, and indeed there was evidence both of higher prices and of actual reductions in numbers of household connections. Any productivity gains were thus distributed to owners as increased returns on capital. Furthermore, the review concluded that: “Most cross-country papers on utilities find no statistically significant difference in efficiency scores between public and private providers. As for the country specific papers, some do find differences in performance over time but these differences tend to matter much less than a number of other variables.”

An Unrealistic Vision
Liberalised systems of the North are themselves now the subject of controversy. In the USA and Europe, expectations of lower prices have been disappointed and replaced by resentment at high prices. In addition, an increasingly prevalent view is that the system is unable to deliver the kind of investment needed for dealing with climate change. While the institutions of liberalisation look set to remain, its benefits are no longer taken for granted (see here and here).

Although the experiments with privatisation and liberalisation have been costly and their effects not desirable, the image of the state has been distorted by venture capitalists who focus on their private gains and on general lack of confidence in the state. Regulating markets may be an instant relief to the undesirable symptoms of the already liberalised markets but what should be considered as a long term strategy is how to construct a generation-to-generation growth of the core services to provide the foundation for a better society and its social participants. This task is simply too important, too big and too risky to leave in the hands of the profit-seeking private sector and market forces. Chang (2012) highlights that ‘markets are, in the end, man-made devices for utilitarian purposes, not a force of nature that we should not try to resist. If they end up serving the interests of only a tiny minority, as is increasingly the case, we have the right – and indeed the duty – to regulate them in the interest of greater social good’. The global historical evidence has shown that this universal model of liberalisation for growth has not led to the expected results. To the extent that there was ever a trend of global liberalisation movements in the 1990s-2000s, the current trend is rather static or in some countries, a reverse trend. There is no need for developing countries which have not liberalised to feel out of line: they are very much part of the mainstream.

Jenny Tue Anh Nguyen is a PhD student in Economics at the University of Greenwich.

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