Neoliberal assault and the role of public sector

Under the neoliberal assault of the last four decades, or so, the role of the public sector has diminished, and with it its capacity – especially as it outsourced more and more of its functions to private sector/consultancy firms/individuals – where it basically was seen as only a facilitator to the private sector and limiting itself to only correcting market failures, and not becoming an active player, in both co-creating markets, and through meaningful, pro-active, and mission-oriented governance, and incentive structures, increasing the productive- and allocative efficiency of economy, including working towards reducing transaction costs to overall protect the interests of the demos.

Moreover, this is not done in the broader sense of especially environmental, epidemiology, and elections domains, given as a result of both neoliberal assault and fast-unfolding of existential threats which, in turn, have given way to rising inequalities, diminishing impact of public opinion over public policy, and instead greater influence of moneyed interest.

With regard to rolling back this neoliberal project of limited role of government – something which has also been amply been exposed as a wrong policy in terms of the deep cracks in the capacity of governments in general globally both in terms of lack of role to check existential threats in their works and also to be better prepared to deal as, for instance, with the climate change crisis induced climate catastrophes, or its related phenomenon in the shape of Covid pandemic – a Project Syndicate (PS) published article ‘Restoring public-sector capacity where it counts’, which is co-authored by internationally renowned economist, Mariana Mazzucato underlined the need to increase the role of public sector.

The article pointed out for instance that ‘After years of underinvestment, governments around the world are struggling to keep pace with growing demands.

The consequences are now widely evident, as underfunded and unprepared public agencies falter whenever crises strike. The problem is not “slimming” government down, but rather rendering it more capable, strategic, outcomes-oriented, and a good partner in solving the greatest problems of our time: providing adequate housing for all, strengthening climate resilience, and ensuring that technology makes our lives better, not just a few “bros” richer. …Today’s intertwined crises demand a new public-sector economics that regards the state as a proactive market shaper, co-creating innovation, public services, and socio-technical systems for inclusive, sustainable, and resilient futures.’

Another impact of Neoliberalism is that since it is significantly based on neoclassical/monetarism; it saw greater role of aggregate demand side in determining inflation. This, in turn, meant that over-board monetary, and fiscal austerity policies were used to rein in inflation.

It is important to note that inflation has traditionally been significantly determined by both aggregate demand, and supply sides – unlike as seen under Monetarism that inflation is mainly a monetary phenomenon – and more so in the wake of fast-unfolding of existential threats, which has increased the intensity, and frequency of shocks, disrupting, in turn, aggregate supply-side as seen for example in the wake of Covid pandemic.

Since inflation (wrongly) was seen as mainly a monetary phenomenon, both under International Monetary Fund (IMF) programmes, and under the influence of ‘Chicago boys’-styled local policymakers, which have been amply supplied in the last four decades or so of neoliberal assault, becoming all the more entrenched as ‘sound’ or mainstream economics in leading universities globally, and which were aped considerably by domestic universities in general as well.

This has meant that the role of government sector got diminished as a result of this line of policy thinking, where instead of properly focusing on institutional – governance, and incentive structure – reforms on the aggregate supply side, mainly the instrument of policy rate was used to reduce inflationary trends.

Not only that proved to be a piecemeal solution to reining in inflation, one limited at most to the short-term, given the more long-term, institutional weakness on the supply-side in terms of supply-chains and markets efficiencies, it also meant economic growth was unnecessarily sacrificed for short-lived macroeconomic stability.

The criticism of unnecessarily reducing the role of public sector is not new, especially in the wake of serious negative outcomes indicated by for instance, the Global Financial Crisis 2007-08, and then during the Covid pandemic, all pointing towards the urgent need to revisit the role of public sector. This meant increasing the role of public sector in its meaningful colours as was seen for instance in the wake of implementation of Roosevelt’s ‘New Deal’ policies, with the added feature of introducing an even more expanded role of public sector in the shape of enforcing a ‘Green New Deal’ type policies in the wake of fast-unfolding existential threats, and over-financialized global economy.

An important aspect of reviving the role of public sector is to stop equating it with the role played by private sector, given as rightly pointed out in the April 10, PS published article ‘Governments are not startups’, whereby it was pointed out that ‘Around the world, governments are trying to reinvent themselves in the image of business. …The problem is that governments and businesses serve vastly different purposes. If public policymakers start mimicking business founders, they will undermine their own ability to address complex societal challenges. …For startups, the highest priority is rapid iteration, technology-driven disruption, and financial returns for investors. Their success often hinges on solving a narrowly defined problem with a single product, or within a single organization.

Governments, by contrast, must tackle complex, interconnected issues like poverty, public health, and national security. Each challenge calls for collaboration across multiple sectors, and careful long-term planning. The idea of securing short-term gains in any of these areas doesn’t even make sense.

Unlike startups, governments are supposed to uphold legal mandates, ensure the provision of essential services, and enforce equal treatment under the law – more important today than ever. Metrics like market share are irrelevant, because the government has no competitors.’

Unfortunately, this discussion on the misgivings of Neoliberalism, over-board austerity, in terms of unnecessarily reducing the role of government, among other negative aspects of these policies, and which is in the forefront of global policy dialogue, especially in the wake of the Covid pandemic, is hardly reflected in public policy domain.

Unfortunately, a very strong imprint of neoliberal policies is something that is reflected by the reported thinking of the current, and many former finance ministers, in addition to media having serious intellectual poverty to see these otherwise glaring policy dialogues taking place globally for a number of years now. That IMF continues to keep neoliberal ideas close to their heart, especially given their immense global exposure, is all the more unfortunate.

Government should invest in re-invigorating the role of government on non-neoliberal lines, and do this as quickly as possible, given a world of polycrisis, and fast-unfolding nature of existential threats.

One thread to follow for greater understanding of the role of public sector is exploring the work of ‘University College London Institute of Innovation and Public Purpose’ (UCLIPP) which it is doing in the shape of a project to develop a meaningful ‘Public Sector Capabilities Index’ (PSCI).

In this regard, the government may even consider forging a technical collaboration with UCLIPP for better dealing with specific challenges, and opportunities facing the public sector of Pakistan, especially given it is a high climate change vulnerable country, and reportedly with a very high level of poverty, and debt distress.

With regard to PSCI, the UCLIPP pointed out for instance the following: ‘Local governments across the world face mounting pressures to address complex urban challenges—from climate change and public health crises to growing inequality and economic transformation.

Yet prevailing frameworks for assessing public sector capabilities focus too narrowly on market regulation and economic efficiency, leaving cities without the tools they need to meet today’s urgent demands. …The Public Sector Capabilities Index becomes the first global measure of where government capacity is strong and where critical public sector skills must be developed. …By creating the first global diagnostic tool to measure and understand city government capacity, the Index provides: [1] A clear, actionable picture of where cities excel and where they need targeted investment; [2] Opportunities for rapid scaling or strengthening of critical skills, such as: [a] Engaging residents through innovation; [b] Cross-sector collaboration; [c] Leveraging data infrastructure; [d] Utilising digital platforms; [e] An evidence base for resource allocation and strategic decision-making; [f] A platform for collaboration between local, national, and state governments, as well as philanthropic and financial institutions, to fund and support capability building. This initiative positions city governments to respond strategically to global and local challenges, creating stronger public value and resilience.’

Copyright Business Recorder, 2025