From Our Archives: Neoliberalism vs. Social Democracy: Perspectives on Labor

CAIRO - 2 May 2017: History has witnessed the rise and fall of various economic systems all over the globe. Today, two economic systems rule the world: neoliberalism and social democracy. Embodying pro-neoliberalism is the United States, which is backed by two of the world’s most powerful economic organizations—the World Bank and the International Monetary Fund—who have been extremely active and persistent in trying to convince developing countries to adopt a neoliberal system. On the other hand, Nordic countries like Denmark, Norway, Sweden, and Finland alongside Canada top the list of countries adopting social democracy.

The differences between the two systems are huge, sometimes even considered as opposites of each other, raising endless debates among economists about which system is the best one.

Neoliberalism is heavily associated with a free market system. It is, however, considered one of its radical or very loyal forms. In terms of the economy, neoliberalism believes the market functions itself, and that state intervention is a bad idea, except in very special cases. The “free-thinking” extends to all other economic aspects, including labor. For instance, the ideology is not in favor of social security programs and heavily argues against them, and as a result, labor workers become more and more absorbed in their jobs. Terms like a cog in the machine became popular as neoliberal systems rose more and more to power, showing how the system makes laborers feel.

In neoliberalism, the main goal of the economy is maximizing profit and generating growth, and to do that, minimizing cost is crucial, and labor is considered another cost. This is highly related to the assumption that when growth happens, the benefits will be spread to everyone, and not only will the rich get richer, but everybody else as well. An assumption that has been proven wrong in many cases. A research paper published by the International Monetary Fund (IMF) in 2015 titled “Causes and Consequences of Income Inequality” raises the argument that the policies of “Reaganomics” are not working. Reaganomics refers to the economic policies presented by the U.S. President Ronald Reagan in the 1980s. The policies were based on the trickle-down theory, that lowering taxes to decrease the burden on businesspeople will increase investment and that will lead to the creation of more work opportunities and thus people will have income.

According to the research, which studied data from 159 countries from 1980 to 2012, the economy grew slower by 0.08% over 5 years when the richest 20% have their income share increased by 1%. “In contrast, an increase in the income share of the bottom 20% (the poor) is associated with higher GDP growth,” the report says. Meaning that when tax cuts and higher salaries are given to the poor, the economy grows much more than when these are given to the rich.

Also, recently OXFAM published a report paper stating that “The global inequality crisis is reaching new extremes. The richest 1% now have more wealth than the rest of the world combined. Power and privilege is being used to skew the economic system to increase the gap between the richest and the rest. A global network of tax havens further enables the richest individuals to hide $7.6 trillion. The fight against poverty will not be won until the inequality crisis is tackled.” There have been growing voices during the past couple of years that criticize trickle-down economics and its effects on economic inequality and how that affects growth and social stability, even by the same institutions that promoted it.

Social democracy on the other hand is considered a more sympathetic approach. Despite popular belief, social democracy does support capitalist economies, and supports innovation and creation, however, it also supports government intervention to achieve social justice. So while social democracy supports a free market economy, it believes that in certain aspects, particularly those related to achieving social justice, the market should not be 100% free to act on its own. The logic behind this belief is to try to avoid the unjust consequences of neoliberalism, where often, the ideology has resulted in rich people becoming richer, while the poor become poorer.

For example, in Nordic countries which are social democracies, free healthcare is guaranteed to all citizens, alongside free education.

At first glance it may seem obvious that social democracy is the much better choice, but many argue that unless certain conditions exist, it may not be applicable. Many economists believe that unless a country is already wealthy enough and has enough money, social democracy will not be a realistic goal. Therefore, it can only be implemented later on, as a shift from a successful neoliberal system, and developing countries according to that argument, should focus on achieving high growth levels through capitalist neoliberal systems first as their main priority.

Egypt straddles the line between the two systems when it comes to labor. The economic system in Egypt has handpicked things from both systems, and has yet to settle on one to implement in this crucial period.
For example, public and private hospitals are almost free, yet the quality is extremely substandard, so while a worker might think he does not need to be covered through his job, it is not true, because otherwise he will receive extremely bad service. In terms of rights, Egyptian labor suffers a lack of proper securities, starting from not having formal contracts allowing many to be fired at any time, in addition to discrimination in the workplace and illegal employment. Egyptian labor lacks proper representation as well, as many movements and unions were fought during Mubarak’s era in fear of them turning into political movements, and as a result that made it harder for labor in Egypt to mobilize as a force.

Recently, there has been a shift toward a more neoliberal approach, with subsidies already being lifted, and plans to lift the rest in the future have been announced.

Egypt’s case is proof of the inefficiency of neoliberal systems when it comes to labor. During the last few years of Mubarak’s era, and as a result to the neoliberal economic policies implemented, Egypt’s growth rate levels were tremendous, reaching more than 6 and 7% each year. This, however, did not trickle down to the people. Unemployment and poverty levels kept getting higher, while the rich kept getting richer. This was at the end, among the main reasons why the 25th of January revolution happened.

It can be argued that Egypt is actually very capable of implementing a proper social democracy, and that the country does not lack any resources, but only suffers from corruption and lack of proper vision. Considering the fact that Egypt has some of the world’s most beautiful and ancient touristic spots, the Suez Canal, and a population of 100 million, creating a great marker of opportunities for any investor, the claim that Egypt can be a social democracy may not be far from the truth.

“The argument dominating the world right now is the neoliberal one, which believes that economies should not have fixed regulations when it comes to labor, since they work as a disincentive to working harder, and hinder creativity. Also, they make employers fear working their labor probably which affects production. In reality though things don’t work like that,” says Professor of Economics at the American University in Cairo Ibrahim Awad.

The former director of the International Migration Programme at the International Labour Organization argues that in Egypt, for example, even though the labor market is not strictly speaking regulated, as there is a disparity of power between workers and employers, it did not result in better conditions for everyone.

“We know now that growth by itself is not sufficient. The whole idea that creating growth will as a result create employment is not true. In 2008-2009 we used to achieve very high growth rates, but poverty increased nonetheless and employment did not get any better,” he explains.

Awad believes that the key to achieving balance between growth and benefiting labor is having strong, clear policies, while guaranteeing proper working conditions for workers.

“There are certain conditions that should be respected, and it is not just a matter of human rights, but respecting these conditions will prove to be beneficial for everyone. These conditions will help workers improve their productivity, which will also help the employer,” Awad adds.

Having proper employment policies is also crucial in Awad’s opinion, as they will help create employment and protect workers’ rights. “Growth accompanied by employment policies is the best way to formulate the market. Employment policies should work as incentives that encourage people to work harder, while protecting their rights. Assuming that Egyptians are going to react by being lazy if guaranteed employment is racist, and this argument is actually used in many other places, and it’s a common approach when it comes to the relationship between workers and employers and labor relations, but it is not true.”