Neo-Classical Counter Revolution Theory:

During I980's when conservative govts. were in power in US, UK, Canada and Western Germany the neo-classical counter revolution theory and policy was revitalized. This counter revolution favored supply-side macro economics and privatization of state-owned corporations in DCs, and it stressed upon dethronement of public-ownership and govt. regulations in UDCs. This theory of denationalization under the disguise of privatization, and deregulation got much more importance in Washington at the headquarters of IMF and IBRD, UNDP and other international agencies which are engaged in the stabilization and structural adjustment like programs. Such neo-classical theory is a reaction to the interventionist arguments of dependence theorists.

The Dependencia Models of International Poverty are of the opinion that the poverty of UDCs can be attributed to exploitation of the poor countries by the rich countries. But the proponents of neo-classical counter-revolution theory like Lord Peter Bauer, Deepak Lai, Ian Little, Harry Johnson, Bela Blassa, Julian Simon, Jagdish Bhagwati, and Anne Krueger are of the view that under-development results from poor resource allocation due to incorrect pricing policies and too much state intervention on the part of UDCs in their economic activities. Thus it is the state intervention or the greater role of state in the economic life which has slowed down the pace of economic growth in the UDCs. Therefore, the non-interventionist or neo-conservatives emphasize that if free markets are allowed to flourish, public enterprises are privatized, free trade is promoted consequent upon export expansion, foreign investors are welcomed, plethora of govt. regulations is eliminated, and the price distortions in goods, labor and financial markets are removed, such all will stimulate economic efficiency and economic growth. Thus against the view of Dependencia Models whereby poverty of Third World is attributed to predatory activities of the First World and International Agencies, the neo classical counter-revolution theory says that:

"It is heavy hand of state and corruption, inefficiency and lack of economic incentives that permeate the economies of UDCs. Therefore, rather reforming international economic system, or restructuring of dualistic economies, or increasing the flow of foreign aid to UDCs, or attempting to control population growth, or emphasizing upon more effective central planning the UDCs should stress upon Free-Markets, and Laissez-Faire Economies".

The govts. of the poor countries should allow the "magic of the market place" and invisible hand to guide to resource allocation and promote economic development. Thus the neo-classical counter-revolution theory is an attempt to restore private capitalism through the slogan of "privatization".

The neo-classical economists (counter-revolutionists) give the examples of Asian Tigers (South Korea, Taiwan, Hong Kong and Singapore etc.) who marvelously stimulated their economics on the basis of "free markets and price mechanism", whereas the economies of Africa and Latin America worst failed even they depended upon 'interventionist policies'.

The neo-classical challenge to present orthodoxy can be bifurcated into three compositional approaches, as:

(i) Free Market Analysis:

According to this approach, the markets alone are efficient, as the goods markets provide reasonable signals for investment in new activities. Again, the labor markets show the reaction properly automatically in new industries. Moreover, the entrepreneurs know better that what to be produced and how they are to be produced, as the factor and goods prices reflect the true scarcity of their present and future prices. Even if there is no perfect competition such remains effective. People have complete freedom to invent new goods. In the same way, each economic agent easily avails of all information more or less freely. In such like stale of affairs, any govt. intervention will not only be unproductive but it will also lead to create distortions. Thus the development economists who support free markets are of the view that if we implement the free market economic system all over the world it will result in more efficient situation, and the market imperfections will be of least importance.

(ii) Public Choice Theory/Modern Political Economy:

This approach is also known as Modern Political Economy. This theory states that govts. fail to do anything good. As this theory accepts that the politicians, bureaucrats, citizens and the state function just on the ground of their interests. In other words, they use the govt. authority and power for their personal interests. The citizens get their certain objectives (which are called rent) with their political influence though govt. policies, as they are often found engaged in getting import licenses or scarce foreign exchange . Whereas the politicians use the govt. resources to cumulate or maintain their power or authority. While the states are always found desirous to confiscate private properties. Such all leads to misallocation of resources as well as losing of personal freedoms. Thus, this theory advocates the limited-or minimal size of the govt.

(iii) Market Friendly Approach:

This is a present variant of the Neo-Classical counter revolution theory which is available in the writing of WB and its economists who were present in the catnips of free markets and public choice during 1980s. This approach accepts that there do available the imperfections in the product and factor markets of UDCs. Accordingly, govt. has to play an important role in this regard so that the markets could function well. But, the govt. will have to play this role through Market Friendly Approach. As it will have to create a suitable and favorable environment for private enterprises by providing them physical infrastructure, health-care and educational facilities. The market friendly approach is different from free market approach and the public market approach, as this theory admits that there is a greater role of market imperfections in the developing countries, particularly, when we see that there exists lack of coincidence between investment activities. Again, one finds externalities due to investment. Moreover, the imperfections are either available in a limited amount, or they remain missing. Furthermore, one finds externalities regarding learning, and the attainment of scale economies become weaker in the markets of UDCs.

Criticism:

During 1970's Dependence Revolution was observed in the literature of development economics where the dependence theorists considered underdevelopment as an externally induced phenomenon. But in 1980's the proponents of free markets brought a counterrevolution which has been given the name of neo-classical counter-revolution. The neoclassical revisionists consider underdevelopment as internally induced LDC's phenomenon which is surrounded by govt. interventionists and bad economic policies. Now there rises the question whether free markets and less govt. intervention will serve the purpose of attaining economic development on the part of UDCs. In other words, whether market allocation will perform a better job than state intervention? The answer is not positive. In this respect following arguments are given.

The economic, social, political, institutional and organizational structure of UDCe are different from their western counter parts. Accordingly, the assumptions and policy percepts of neo classical theory will hardly be applicable in case of UDCs. The UDCs lack competitive markets. Consumers are not sovereign. The economies of UDCs are furnished with market imperfections. The markets are fragmented, the limited information are available regarding employment, investment opportunities and techniques of production. The money market is divided into organized and unorganized markets. The people are highly illiterate. Their economies are still non-monetized. The speculative activities are preferred over manufacturing. The land is a token of prestige, rather a source of income. There exists big divergence in between private benefits and social benefits. The poor societies have to face both consumption and production externalities. There exist discontinuities in production and indivisibilities (i.e., economies of scale) in technology. Producers, whether private (Liver Brothers, D.G. Cement, Crescent Sugar, Sitara Chemicals etc. in Pakistan) and public (Wapda, Sui-gas, Pakistan railway etc. in Pakistan) have a great power in determining market prices and quantities sold. The Utopia and idealism of competitiveness is hardly available in UDCs like Pakistan. In case of UDCs the markets are characterized with disequilibrium and structural bottlenecks. Accordingly, in these countries the responses to price and wage movements can be "perverse" (i.e., not in the direction of equilibrium). There exists monopolies in connection with resource purchase and product sale. In the countries like Pakistan Lewis model of unlimited supplies of labor applies, i.e., the unlimited amount of labor is available at the prevailing wage rate. In such situation, the wages will remain depressed benefiting the profit earners at the cost of wage earners. Thus the invisible hand in the poor countries like Pakistan will not act to promote the general welfare but rather it will lift up those who are already well-off by pushing down the vast majority. In other words, the resources of the poor economies will shift in favor of rich elites.

The liberalization of 'International Payments System', i.e. the convertibility of rupee in dollar in Pakistan and open sale and purchase of dollars will put our economy in trouble when we are having a poor export base and a higher import-base. Again, we do not possess any thing to meet the challenges which would arise after the promulgation of WTO rules. In such state of affairs, our dependence on international agencies like IMF and IBRD will increase (like previous experience) where we will be victimized by their conditional ties. Such scenario will be nothing more than what has been told to this by 'the Neo-Marxist theory of growth'.

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