Karl Marx did not foresee an end to the contradictions inherent in Western industrial capitalism until the ruling capitalist class was overthrown by the politically mobilized working class and a socialist society was established.
But more moderate critics of capitalism saw other possibilities, to bridge the widening gap between the owners of capital and the working class and avoid violent socialist revolution. The western welfare state under social democratic regimes presented such a possibility. The strategy was to create a broad-based social citizenship that would promote horizontal and vertical social solidarity transcending various divisions among people within a nation-state framework through social reforms, progressive taxation and increasing social investments. While progressive taxation was expected to narrow income disparities and improve the living and working conditions of the masses, social interventions like secular education, equal opportunities and basic social, economic and political rights were expected to structurally integrate otherwise diverse segments of society in social and cultural terms -- religion, language, ethnicity, gender, etc.
So, the state representing diverse interests intervened to resolve issues and disputes through evidence-based, equitable public policies thereby creating a broad-based social citizenship that primarily determined the collective identity of the people, relegating culturally-based identities to the private sphere. On the other hand, high levels of taxation allowed the state to socialize basic public services like education, health, social protection, transport, childcare, etc. so that citizens had access to these services in an equitable manner.
The modern welfare state model that originated in Europe, in its varying forms remained confined to a small part of the world that encompassed Northern and Western Europe, Canada, Australia, Japan and New Zealand. Most countries in the rest of the world by and large remained underdeveloped and the living and working conditions there remained much to be desired. Citizens of these countries were poorly integrated, both vertically and horizontally.
Industrialization in the developed world created regular employment for the vast majority of citizens. Regular employment in turn enabled working people to have access to minimum wages, unemployment insurance, old age pensions, etc. Increasing personal and corporate taxes enabled the state to socialize many services such as health and education so that citizens could have access to these services irrespective of their class, occupational and social background. Class disparities and income inequalities were reduced to a significant degree, giving even the members of the working class a sense of security and belonging as citizens of a state. Under such conditions, identities based on religion, race, etc. became confined to the private sphere and had little or no influence on the life chances of citizens.
The situation has been vastly different in the developing world in general. The lack of industrialization compelled the vast majority of people to rely on primary production in peasant agriculture, fishing, and artisan work, mostly as self-employed people. Many wage earners did not enjoy decent working or living conditions. Many urban residents engaged in informal sector activities and lived in disadvantaged urban settlements. This is not to underestimate the socio-economic and political diversity that characterized the developing world as a whole. Nevertheless, the socio-economic conditions there were very different to those found in the social democracies mentioned earlier. The main challenge for underdeveloped countries was to achieve a higher level of development that would raise the overall standard of living of the ordinary people. It is this prospect that neoliberalism offered to these countries several decades back.
The removal or relaxation of national barriers to international Governments in developing country had to accept to get integrated into the global economy. By now, most countries, irrespective of their previous ideological inclinations have fallen in line. The result has been a massive social transformation in the countries that have become part of the globalized capitalist system.
Social transformation that development under neoliberalism has brought about is quite different to that of capitalist development produced in European welfare states under social democratic regimes. There is neither horizontal nor vertical integration of citizens in these countries. As a result, a large majority of people remain alienated from the state and mainstream institutions. So, they continue to revolve around traditional institutions and centres of power and influence. This needs some elaboration here.
As is well known, neo-liberal economic reforms necessitated low tax regimes so as to attract and retain foreign capital. Capital would flow into the country only if the owners of capital could earn higher profits. Similarly, unprotected and abundant cheap labour was also a major attraction to investors. When such conditions are fulfilled, the host state could neither create working and living conditions that are comparable to those found in European welfare states nor contain economic disparities between social classes within reasonable limits. In other words, there is almost no vertical social solidarity that creates a sense of equity and equality of opportunity among citizens. While a few people become extremely wealthy, most people remain at or below the subsistence level. Weak social sector programmes make the situation worse as vulnerable groups have no access to social benefits that are necessary to cope with adverse market conditions. Inability of the state to effectively deal with issues of inequality, injustice, discrimination and deprivation leaves considerable space for primordial identities to surface and mediate between competing groups in society. In the absence of an overarching national identity in the form of a broad-based social citizenship, primordial divisions become an important basis of social solidarity and informal social support. The result is the segmentation of society into competing and even conflicting subnational divisions, as is evident from social unrest and violent internal conflicts in many peripheral countries in the world.
As the discussion so far in the present article has shown, neo-liberal economic reforms have helped many developing countries around the world to achieve a higher level of economic growth but economic expansion has been accompanied by growing social disparities and unstable and poor working and living conditions for the vast majority of their citizens. Meanwhile, limited social policy interventions by the state based on secular democratic principles has allowed primordial identities like race and traditional institutions like religion to have considerable influence not only on large sections of the population but also on the state itself, creating conditions conducive for the rise of ethno-religious fundamentalism. As is well known, today, such fundamentalist movements not only threaten socio-political stability in developing countries like Sri Lanka but also the entire secular democratic world.