Neoliberalism as Neocolonialism

By Jayati Ghosh | May/June 2020

This article is from Dollars & Sense: Real World Economics, available at

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This article is from the May/June 2020 issue.

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This article is from our series on the history of neoliberalism, solicited as part of our celebration of the 45th anniversary of Dollars & Sense. Find other contributions to the series here and here. The author wrote her contribution in November and updated it in April in light of the global COVID-19 pandemic. —Eds.

The damaging effects of neoliberalism—and the terrible legacy it leaves behind even for governments trying to change their countries’ economic directions—are by now well known: Growing domestic wealth and income inequalities, the erosion of regulations on capital, the elimination of protections for workers, the increased instability of economic life (with periodic business-cycle crises), the obsession with fiscal austerity policies that dismantle the welfare state and deprive citizens of their economic rights, and ever-deepening and spreading financialization. All of these features of neoliberalism are now generally accepted, even by some of its defenders. Now the COVID-19 pandemic is bringing home the fact that neoliberalism is posing a massive danger to public health and, therefore, to the very survival of societies.

One feature that is less remarked upon—and often even less noticed—is the role that neoliberal policies have played globally, in reinforcing contemporary imperialism. This has occurred through the way neoliberalism operates in developing countries, including in so-called “emerging markets.” This tendency of neoliberalism is often disguised by the recent “rise” of some Southern powers, most of all China, and the perception that these changes make earlier notions of imperialism outdated. Yet in many ways, current global economic structures impose constraints upon developing countries that are so severe that they are actually quite similar to the constraints that are characteristic of the period of direct colonial control. Neoliberalism has created a revamped form of neocolonialism.

Financialization and Neocolonialism

The first and most obvious route through which neoliberalism imposes a new colonial-like control is through financial liberalization and the associated financialization of much of economic life. Financialization has been marked not just in advanced economies but in many developing countries as well. Financial deregulation has undermined the diversity of financial structures, suited to the particular national context and to the advancement of economic development objectives, created in the newly independent developing countries in the mid-20th century. Developing countries—even those at relatively low levels of economic development and diversification—were told, instead, that financial liberalization was essential for them to attract external capital that, in turn, was supposedly essential to finance economic development. Indeed, the International Monetary Fund (IMF) and the World Bank have actively pushed financial liberalization on developing countries, regardless of their specific contexts and degree of development, and particularly in the wake of balance-of-payments crises that revealed their external vulnerability.

There are, of course, several other ways in which the new global architecture of trade, investment, and finance has reduced the policy autonomy of developing countries and undermined their prospects for productive diversification and sustainable economic expansion. For example, intellectual property rights and the monopoly privileges they confer on multinational companies—mostly based in the global North—have been significant, by sharply reducing the possibilities of emulation that formed the basis of almost all successful industrialization from the 19th century onwards, in currently rich countries like Germany, the United States, Japan, and so on. Trade liberalization and export obsession empowered extractive industries (like mining, petroleum, forestry, etc.) and forced a shift back to primary product exports in many developing countries, thereby stalling and in some cases even reversing their attempts at economic diversification and structural transformation. But in this piece, I will focus specifically on financial liberalization and its effects.

Policymakers across the developing world, and especially those in finance ministries, internalized the view that financial liberalization was necessary to improve the functioning of the financial sector. This was supposed to be the key to increased profitability and competitiveness. It was supposed to make financial intermediation—the linkage between savers and borrowers—more effective. It was also the supposed key to attracting international capital and thereby increasing the resources that were available for domestic investment. These ideas were usually supported by the media, which caters to the elite in most developing countries. Their constant reiteration ensured that such measures had wide support among both elites and middle classes, who often have the most political voice in these countries.

As a result, many key features of existing financial structures and policies in developing economies were eliminated. Developing-country governments had directed credit to specific key industries. Without such policies no country has successfully industrialized. They had created financial institutions to serve specific development purposes, such as development banks and other institutions to finance long-term investment. They had imposed domestic regulations that prevented financial fraud and the siphoning off of savings for private gain rather than social purpose. They had imposed controls on cross-border capital flows to reduce vulnerability to global economic conditions. They had established controls on foreign ownership of financial assets, preventing the external takeover of key resources. It is worth noting that the one major economic success story of recent decades—the People’s Republic of China—did not embark on financial liberalization policies. Even now the Chinese state retains significant control over domestic financial institutions and cross-border movements of capital.

The effects of financial liberalization across the developing world are, sadly, now only too obvious. Globally, there are three major consequences:

First, the international financial system has been transformed in ways that substantially increase systemic risk, and make the system more crisis-prone. Within the financial world, there is a complex web of entanglement, with all firms mutually exposed to different kinds of risks, but each individual firm exposed in differing degrees to particular financial entities. It is difficult to judge the actual risk exposure of individual financial institutions. This makes a mockery of prudential regulation, such as “capital adequacy” ratios, which have supposedly become stricter over time, since it is difficult to actually define or measure the extent of capital when risk weights can be changed and assets themselves are loosely defined. The process of financial consolidation has substantially increased the risks associated with the system.

Second, for developing countries, there were further dangers associated with exposure to new kinds of risk. Financial liberalization creates a propensity to financial crisis, both external and internal. Such crises can have a deflationary impact on real economic activity and reduce access to funds for small-scale producers, both urban and rural. This in turn has major social effects in terms of loss of employment and the decline of standards of living for most citizens. Financial liberalization also reduces developing countries’ domestic policy autonomy. With increased exposure to global financial markets, and completely unbridled international capital flows, it is no longer possible for a country to control the amount of capital inflow or outflow. Both movements can create undesirable consequences. If, for example, international investors suddenly flood a country with foreign portfolio investment, it can cause the national currency to appreciate. Unless the capital inflows are simply (and wastefully) stored up in the form of accumulated foreign exchange reserves, they are necessarily associated with current account deficits. This occurs because, as the exchange rate appreciates, exports become more expensive, and imports become cheaper, making domestic production less competitive, and shifting production away from traded goods (imports and exports) to non-traded activities (including finance and real estate). Over time, this can also derail the project of industrialization, especially when dynamic economies of scale are involved so that lower production reduces opportunities of learning by doing and production synergies. Financial liberalization has therefore created a new problem which is analogous to what economists dubbed “Dutch disease,” (so called because of the experience of the Netherlands with the sudden discovery of North Sea oil that increased oil exports and rendered other forms of domestic production less competitive) with capital inflows causing an appreciation of the real exchange rate that, in turn, causes changes in the real economy.

Third, an even more powerful impact of financial liberalization is that it forces governments to adopt deflationary fiscal policies to appease financial interests. To begin with, the need to attract internationally mobile capital means that there are limits to taxation, especially on capital. Typically, trade liberalization has already reduced the indirect tax revenues (as from tariffs) of states undertaking financial liberalization. With financial liberalization creating pressures to limit other taxes, the overall tax-to-GDP ratio often deteriorates. This imposes limits on government spending, since finance capital is generally opposed to large fiscal deficits. Financial liberalization, therefore, reduces both the possibilities for countercyclical macroeconomic policies—where the state increases spending to boost demand during an economic downturn—and the developmental or growth-oriented activities of the state.

Finance and Development

Financial liberalization can dismantle the very financial structures that are crucial for economic growth and development. While the relationship between financial structure, financial growth, and overall economic development is complex, the basic issue of financing for development is how to mobilize or create real resources. In the classical development literature of the mid-20th century, finance in the sense of money or financial securities came into play only when looking at the ability of the state to tax away a part of the surplus to finance its development expenditures, given the obstacles to deficit-financed spending. By and large, the financial sector was seen as adjusting to the requirements of the real economy.

Small Producers Under Financial Liberalization

In the developing world, financial liberalization has especially negative effects on employment-intensive sectors such as agriculture. For small-scale producers, the transaction costs of borrowing tend to be high, the risks are many, and collateral is not easy to come by. The agrarian crisis in most parts of the developing world is at least partly, often substantially, related to the decline in peasant farmers’ access to institutional finance, which is the direct result of financial liberalization. Reductions in state-directed credit towards peasant farmers and other small producers have contributed to rising costs of credit, greater difficulty accessing necessary working capital for cultivation and other activities, and the reduced economic viability of cultivation.

All of these effects have added directly to rural distress. In India, for example, the deep crisis of the cultivating community has been associated with farmer suicides, mass out-migrations from rural areas, and even deaths from starvation. There is strong evidence that, in different parts of rural India, these and other forms of distress have been related to the decline of institutional credit, which has forced farmers to turn to private moneylenders and involved them once more in interlinked transactions to their substantial detriment.

In this brave new world of today, when the financial sector is increasingly left unregulated or minimally regulated, market signals determine the allocation of investible resources. It was earlier believed that this is both desirable and more efficient, but both actual historical experience and analyses since then have underlined that the most successful development experiences have emerged from “getting prices wrong,” that is, moving away from market signals. Financial deregulation means that available savings are allocated by financial intermediaries to the sectors that are most profitable. In other words, private benefits, rather than overall social benefits, determine the allocation of savings and investment. Credit is directed to non-priority and import-intensive but more profitable sectors. Investible funds are concentrated in the hands of a few large players. Savings are directed to already well-developed centers of economic activity. The socially desirable role of financial intermediation therefore becomes muted.

Financial liberalization also has a negative impact on any medium-term strategy of ensuring growth in particular sectors through directed credit, which had been the basis for the industrialization process through much of the 20th century. In a large number of developing countries in the past, the financial structure was developed with economic development objectives in mind. Financial structures were created to deal with the difficulties associated with late industrial entry.

By the 20th century, minimum capital requirements for entry in most sectors were high because technology for factory production had evolved in a capital-intensive direction since the Industrial Revolution. Competition from more established producers meant that firms had to concentrate on production for a protected domestic market or be supported with finance to survive long periods of low capacity utilization (during which they could find themselves a foothold in world markets). Not surprisingly, therefore, most late industrializing countries created strongly regulated and even predominantly state-controlled financial institutions aimed at mobilizing savings and using the allocation of credit to influence the size and structure of investment. They did this through directed credit policies and differential interest rates, and the provision of investment support to the nascent industrial class in the form of equity, credit, and low interest rates.

By dismantling these structures, financial liberalization destroys important policy instruments that historically evolved in late industrializers. This reduces their ability to ensure economic growth through the diversification of production, given the difficulties generated by international inequality (and especially by the fact that other countries have already industrialized). Financial liberalization is therefore likely to have depressing effects on growth for other reasons than just deflationary bias. It keeps countries stuck in their positions in the global value-added ladder, or may even cause regression and downward movement, much as direct colonial control did in an earlier age.

All of this is even more significant because the process of financial liberalization across the globe has not generated greater net flows of capital into the developing world, as was expected by its proponents. Rather, for the past several years, the net flows have gone in the reverse direction. Even the “emerging markets,” which have been substantial recipients of capital inflows, have not experienced increases in overall investment rates, and have built up their external reserves instead. This is only partly because of precautionary measure to guard against possible financial crises; it also indicates prior excess of savings over investment resulting from the deflationary macroeconomic stance.

The workings of international financial markets have actually contributed to international concentration. Developing countries, particularly those in Asia, hold their reserves in U.S. Treasury bills and other safe securities. This contributes to the U.S. economy’s absorption of more than two-thirds of the world’s savings over the past two decades. At the same time, developing countries are losing out from holding their reserves, these very-low-yielding “safe” assets, while capital inflows into these same countries generally reap much higher rates of interest. This undesirable form of financial intermediation is in fact a direct result of the financial liberalization measures which have simultaneously created deflationary impulses and increased financial fragility across the developing world.

Financialization and Political Control

Other aspects of global financial markets—for example the very unequal and unjust treatment of the sovereign debt of developing countries, which typically ensures the assets of North-based creditors while forcing citizens in poor countries to bear the costs of adjustment and repayment—also contribute to the several ways in which the period of neoliberal globalization has worsened the relative position of such countries and hampered the development project. Without the more obvious political control evident under colonialism, neoliberalism has enabled the flourishing of colonial-style economic relations between countries.

These tendencies have become more apparent—and indeed intensified—in the current COVID-19 pandemic that is sweeping across the globe. While some core advanced countries are currently adversely hit by the spread of the virus, the economic fallout in the developing world has already been far more disastrous, even in countries that have not yet been very badly hit by the contagion. Sharp reversals of capital flows, collapses in export and tourism revenues, currency depreciations, and resulting problems of debt servicing have created a perfect storm for developing countries, many of whom are also imposing severe containment measures like lockdowns that are destroying domestic economic activity. Already, capital movements have indicated a global “flight to safety” to U.S. Treasury Bills, which enable the U.S. government to institute a massive stimulus program of government spending and even larger interventions of bond purchases by the U.S. Federal Reserve. Such strategies are simply not available to other countries, particularly developing countries that will face massive external headwinds even as they struggle to cope with the potential havoc created by large-scale infection and the economic consequences of lockdowns.

If anything, current tendencies therefore reaffirm the basic point made in this article: While current structures of imperialist political control are not as explicit and obvious as those of direct colonial control, they nevertheless still function to enforce global inequality, the global division of labor, and imperialist exploitation of the resources and labor of the “periphery.”

is professor of economics at the Centre for Economic Studies and Planning at Jawaharlal Nehru University, New Delhi, India.

Alice Amsden, Asia’s Next Giant (Oxford University Press, 1989); Erik Reinert, How Rich Countries Got Rich and Why Poor Countries Stay Poor (Anthem Press, 2007); United Nations Conference on Trade and Development (UNCTAD), Trade and Development Report (2016).

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