AMHARA LEADERSHIP ACADEMY
DEPARTMENT OF POLITICAL ECONOMY
NEO LIBERALISM AND ITS RELEVANCE TO
ETHIOPIA
By: Chalachew Acham------ALPE0005/11
Daniel Yaregal------------ALPE0006/11
Serkalem Belay ----------ALPE0012/11
Shitahun Worku---------ALPE0013/11
Submitted To: Dr Moges
May, 2019
Bahir Dar
Contents
Abstract -----------------------------------------------------------------------------------------I
I. Introduction-----------------------------------------------------------------------------------1
1. The Concept and Basic Assumptions of Neo liberalism-------------------------------2
2. Does Neo Liberalism Work In Ethiopia?-------------------------------------------------4
2.1. The Rule of the Market (Market Fundamentalism)------------------------------4
2.2. Deregulation-------------------------------------------------------------------------------5
2.3. Privatization-------------------------------------------------------------------------------6
2.4. Individualism------------------------------------------------------------------------------6
2.5. Minimal State (Night Watchman/Laissez-faire)------------------------------------7
3. Conclusion---------------------------------------------------------------------------------------8
Reference ----------------------------------------------------------------------------------------9
Abstract
Currently, neo liberalism is a dominant ideology of the global political economy. Neo liberalists
advocate the neo liberal paradigm as the one best fit for both developed and developing
countries. However, many African countries after their liberation have tried to apply neo
liberalism and failed to succeed. This paper aims to examine whether the neo liberalism political
economy is relevant to Ethiopia. By reviewing different articles, it provides the brief concept and
basic assumptions of neo liberalism. Examining the context of the Ethiopian political economy in
relation to the neo liberal assumptions, the paper concludes that neo liberalism is not relevant to
Ethiopia.
Key Words: Neo liberalism, Assumptions, Ethiopia
I. Introduction
There are many Weberian literatures that advocate the ideology of neo liberalism as the panacea
of political and economic problems of countries regardless of different contexts. Having this
notion, Western powers have influenced the governments of developing countries to swallow
and apply the principles of neo liberalism directly. The Bretton Woods institutions such as the
IMF, the WTO, and the World Bank are the major agents that indoctrinate the neoliberal
paradigm. In Africa, the premises of neo liberalism ideology such as limited government, market
fundamentalism, and individualism have been tested with the help of Western countries and
failed to bring expected development and success. Meles (2006) argued that the fundamental
nature of the neo liberalism paradigm has led the African countries into the dead end. In Meles`s
view, the failure of neo liberalism in developing countries is not a failure of implementation of
the paradigm, rather it is because of the incompatibility of the paradigm to these countries.
Discussing the concept and assumptions of neo liberalism, the paper aims to examine whether
the neo liberalism political economy is relevant to Ethiopia. The central question this paper seeks
to answer is "does neo liberalism work in Ethiopia?". To do so, the paper is organized into three
main sections. The first section presents the brief discussion on the concept and basic
assumptions of neo liberalism. The second section examines the Ethiopian context in relation
with the assumptions of neo liberal political economy. Here, the five basic assumptions of neo
liberalism are used to analyze whether it is compatible with the Ethiopian context. The final
section presents the concluding remarks of the paper.
The primary sources for the concept, assumptions, and arguments are review of literatures on the
areas of neo-liberalism. The methodology employed in this paper is mainly an analytical survey
of literatures from the conceptual and theoretical evidences on neo liberalism.
1. The Concept and Basic Assumptions of Neo liberalism
The spirit of neo liberalism rooted back to the times of Adam Smith. He and other prominent
political economists advocated that free market economy and division of labor which results
specialization of production in the abstinence of government intervention as fundamentals for the
growth of nations (Adino & Nebere, 2016).
Even though an ideology of neo liberalism has evolved over time, it has basic essences both in
politics and economics. In politics, it represents a democratic parliamentary institutions that limit
the rights of rulers while extends the franchise and freedom of individuals. Neo liberalism puts
major emphasis on the individual as the basic unit in society, and on freedom as the central goal
in the relations among individuals.
In economics, it promotes free market and free competition, including no restriction on
manufacturing, no barriers to commerce, and no tariff. Such concepts are liberal in the sense of
no controls/interventions of government. Therefore, the neo liberalism paradigm recommends
governments have to withdraw from the market and left it to the forces of the market [invisible
hands] to determine prices and wages. In other words, competitive markets are both pervasive
and Pareto efficient (Meles, 2006). In neo-liberal theorist’s view, the interference of the state
results market inefficiency and drags the growth rate of the economy below the expectation.
Therefore, they suggest a non-interventionist state and a "night watchman" state as a conducive
to economic growth. In addition to the free market, it promotes strong private ownership of the
economy and reducing the role of the government to establish playing fields in the market
dominated economic system.
According to Stegmann (2004), economic neo liberalism has the following four basic notions.
The first notion is market perfectionism. This implies that the economic system runs naturally by
itself without any government intervention. The Market is predetermined by the "invisible
hands" (demand and supply). The natural order of the economy is God`s business and not the
business of humans. One does not invent/discover them. The second notion is individualism –
autonomy of individuals. This is the belief that individuals have to be left to do everything in the
economy. Neo liberalism proclaims the freedom of the individual and his property, the freedom
of competition, trade, and contract. Therefore, the main slogan of the neo liberalism is "laissez-
fare"- that let the individuals do and go by prohibiting the state from intervening in the economy.
According to Stegmann (2004), neo liberalism considers governments always as the most
wasteful squanderers, because they spend other people’s money. Thus, state abstinence produces
harmony and provides the best result for all involved in the economy. The tasks of the state are
limited to protection from external enemies, creation and maintaining of law and order, and
providing unprofitable, but essential services like education. The third notion is "altruism of
egoism" – that self interest is the driving force in the economy. In neo liberalism, the natural
motive of the economy is the individual`s self-interest. In other words, it is the assumption that
every individual promotes the common good, without knowing and intending it, if he pursues his
own interest (Stegmann, 2004). The fourth notion is fierce competition as the steering wheel of
the economic order. The invisible hands result competition, and competition is the means of
transforming egoism into altruism. Since self- interest is the driving force and incentive of the
economy, everyone is free to compete in the market using his products and services. Competition
brings harmony to the people entirely.
Likewise, Martinez and Garcia (1997) summarized the assumptions of neo liberalism into five.
The first assumption is the rule of the market. This is about liberating free or private enterprise
from any bonds imposed by the state/government no matter how much social damage this
causes. In this notion, the government has no more controls over prices. The second principle is
deregulation. Based on this assumption, the government regulation everything that could
diminish profits, including protecting the environment and safety on the job should be reduced.
The third is privatization. All enterprises in the economy must be owned by private investors. In
other words, the state owned enterprises, including banks, key industries, railroads, highways,
airlines, electricity, schools, and hospitals should be sold to private investors. The fourth
assumption is cutting public expenditure for social services like education and health care. In the
name of reducing the role of the government, neoliberals suggest to reduce the safety-net for the
poor and public spending for infrastructure. The fifth basic principle of neo liberalism is
individualism. In neo liberalism assumption, there is no community/society and the public good
beyond the individuals and private interests. The ultimate goal of neo liberalism is to satisfy the
interests of individuals by granting the unlimited freedom.
Based on the theoretical contributions given above, one can identify at least five interrelated
major assumptions that all neo liberalists share in common. These are the rule of the market
(market fundamentalism), deregulation, privatization, individualism, and limited government (a
night watchman or laissez-faire state),.
2. Does Neo Liberalism Work In Ethiopia?
To provide the arguments for the basic question of this paper, it is more approachable to examine
the compatibility of the Ethiopian political and economic context in relation to the above listed
basic assumptions of neo liberalism.
2.1. The Rule of the Market (Market Fundamentalism)
The most defining feature of neo liberalism is market fundamentalism – the assumption that the
market will, by its invisible hands, work to the benefit of the society. Based on this notion, the
government must withdraw itself from the market, and the market must be left alone, free to
function perfectly.
However, this dominant principle of neo liberalism has failed to consider the conditions where
the market fails to meet the benefits of all. The invisible hands do not efficiently bring about the
allocation of resources. This condition is known as market failure/imperfection. The causes of
market failure may be information asymmetry and/or poor infrastructure. There are a number of
market failures identified by many scholars. But it is better to see the three important for this
paper.
The first one is the market failure of public goods. In the neo liberalism ideology, the driving
force of the market is self interest. Therefore, self interested individuals do not provide public
goods (such as education, health, highway, and defense) that have little opportunity to earn
profit. Because, there are "free riders" that benefit from public goods without paying. Thus, there
should be a government that must hold the responsibility to supply these goods for the society.
This type of market failure has a devastating effect particularly in the economy of the developing
countries like Ethiopia. In Ethiopian, letting the market alone to provide human capital and
infrastructures would cripple the economy of the country. Because, these determinant factors of
the country`s economic growth are undersupplied by the private sector.
The second market failure is because of externality. There are external benefits or external costs
to someone (third person), other than the first decision maker. The free market fails to consider
external costs or external benefits. As a result, the self interested and greedy private investors
want to maximize their profits and economic gains at the expense of the mass. On the contrary,
positive externalities that have greater benefit to the society, but less to the investor may be
undersupplied by the market. Therefore, both negative and positive externalities in Ethiopia need
to be recognized by governmental policies that limit the former and promote the later.
The third type of market failure is monopoly or what Adam Smith called "the conspiracy of
businessman against the public". Monopoly is the condition when the nucleus of the free market-
competition is absent. In this situation, the private firms tend to charge prices higher than the real
costs. Thus, anti- monopoly intervention by the government is needed to reduce unproductive
activities and to increase outputs through greater competition.
For the above three reasons, the basic assumption of neo liberalism that is the rule of
market/market fundamentalism is not applicable to the Ethiopian context. Because, the bulk of
the population resides in rural areas that have limited information and poor level of
infrastructure. Thus, market failure would deny the optimum benefits of the producers (farmers)
unless the government intervenes to the market. The government must supply essential elements
of growth, such as human capital, social services, and social capital. Policy measures also
required to prevent monopolies and negative externalities.
2.2. Deregulation
The principle of deregulation is strongly related with market fundamentalism in which reduces
the government regulations and makes all the markets free to the international trade. The
application of deregulation in the economies of developing countries would have a negative
effect. Because, developing countries could not benefit from the free market system and the free
trade agreement. Having a wider economic status of countries, the global free market would
create losers and winners. Ethiopia, for instance, cannot compete with the developed industrial
states under the free market policy without trade regulation. Giant Western Transnational
corporations would continue to monopolize the market while domestic small industries will
continue to suffer (Fridell, 2006:12). Therefore, deregulation, one of the assumptions of neo
liberalism is not relevant to Ethiopia in the current economic status. Thus, the small and new
domestic industries in Ethiopia need protectionism and subsidies to develop without the threat of
global competition. But these subsidies should not be permanent; rather they should be
temporary and selective until the industries become strong to compete.
2.3. Privatization
The assumption of privatization involves any shift of the production functions of goods and
services from public to private. It includes all reductions in the regulatory and spending activity
of the state.
In Ethiopian context, privatization may enhance the competitiveness and the efficiency of
enterprises in the market due to the profit motive and fear of bankruptcy. However, privatizing
all the public owned enterprises (banks, electric, telecom, and logistics) in Ethiopia may pose
some problems. First, privatization requires the presence of both developed market that
facilitates the privatization process and capable domestic private investor economically and
technically. The second and the most dangerous problem of privatization is social inequality.
This means that when key public sectors become under the control of few wealthier individuals,
they tend to prioritize their profit at the expense of social equity. Services may not deliver to the
society fairly, particularly to the farmers and the poor.
2.4. Individualism
Individualism or individual rights, free choice, freedom or civil liberties and democratic
accountability are the most important features of liberal democracy (Dumenil and Levy, 2001).
This assumption of neo liberalism has a strong positive influence to reduce the frequent
violations of human rights by the government on their citizen. It also helps to make governments
accountable to their citizens.
However, neo liberalism lacks to respond to questions of the rights of collective or groups that
cannot be attained individually. In Ethiopia, there are more than 80 nations, nationalities and
peoples. They had been struggling to answer their questions of national identity, language,
culture, and self governing. The activity of respecting individual rights could not address these
group/collective rights. As a result, multinational countries like Ethiopia need to have a
government that gives equal acknowledgement of nations and nationalities rights to individual
rights. Therefore, individualism which is the characteristics of Western society is against the
Ethiopian society characterized by the principle of collective existence and solidarity.
2.5. Minimal State (Night Watchman/Laissez-faire)
Neo liberal political economists recommend a "night watchman" state model or "laissez-faire"
government whose functions are limited to protect the property rights of individuals by enforcing
laws. To do so, the government should have the legitimate institutions such as military, police,
and courts. Based on this assumption, the state has no right to interfere with free transactions
between individuals. Thus, they advocate laissez-faire government approach to the economy as
the means of economic prosperity.
However, a night watchman or a minimal state whose intervention in the economy is very
limited would be unable to overcome the serious problem of market failures, particularly related
to technology, capital markets, and infrastructure in agriculture (Meles, 2006). This implies that
government intervention in the economy of developing countries has been critical in the
developing process. Thus, in Ethiopia, the assumption of a night watchman or minimal state is
irrelevant because of it exacerbates the existed market failure. Ethiopia needs a strong
government that politically and administratively capable of coordinating and intervening in the
economy.
3. Conclusion
Neo liberalism is a political economy which is characterized by market fundamentalism with a
night watchman/minimal state. It has a strong emphasis on free and competitive market as a self
regulating organ. The basic assumptions of neo liberalism are the rule of market, deregulation,
privatization, individualism, and minimal state.
Although Western countries advocate the neo-liberal political economy as one best fit for all, it is
impractical in Ethiopia because of the following basic reasons. First, the market led by the only
functions of demand and supply [invisible hands] basically fails to understand the Ethiopian
context on the ground. Market by itself has limitations in maintaining equitable, sustainable and
human centered development. It does not worry about environmental degradations and it
generally neglects externalities. Thus, the Ethiopian agrarian economy characterized by
extensive market failure needs selective and effective government intervention to fill the gaps
and to provide public goods that undersupplied by the free market. Second, what neo-liberalism
suggests is a powerless government. It advocates pushing the government out of developmental
activities and empowering few private investors to control the entire nation’s wealth and making
the large masses of the society observers. This implies that the government has to cut social
benefits, relaxed regulations (even activities that harm the people), and permit little control.
Third, the assumption of individualism is basically incompatible with the nature of the Ethiopian
society that characterized by collective existence. Nations, nationalities, and peoples of Ethiopia
need the government that harmonizes collective/group rights with individual rights. Generally,
unadulterated application of the assumptions of neo liberalism is not relevant to the Ethiopian
political economy because of it is not designed to fit our size.
.
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