[Book Review] Free-market reform in developing nations; Can a deregulated economy really save the Third World?

from The Futurist Magazine

Discovering the root causes of poverty in the Third World and attempting to combat them has become a billion-dollar industry in itself. Yet, according to a recent publication by The Independent Institute, international aid efforts may only serve to hinder rather than encourage economic development.

Lessons from the Poor: Triumph of the Entrepreneurs Spirit chronicles the successes of Third World entrepreneurs who lifted themselves up from poverty and overcame obstacles (particularly the labyrinth of government regulations) to become successful business owners. In his foreword, Florida State University economics professor James D. Gwartney declares that, in order for developing nations to become developed nations, people's "natural tendency to act entrepreneurially--to discover opportunities and better ways of doing things"--must be freely encouraged, without interference from the government.

"When regulations limit trade and require people to get permission from the government in order to start a business and try out an innovative idea, they restrict economic progress," Gwartney writes. "They also restrict basic human rights." The book uses case histories to illustrate the claim that the best possible solution is free-market reform, where the objective is a deregulated entrepreneurial environment in which small businesses are allowed to succeed or fail on their own terms. If the most vital method of reducing poverty in Third World countries is the encouragement of entrepreneurial innovation, then perhaps the best way to encourage it is to remove the governmental obstacles that hinder it. This is laissez-faire economic theory at its best. We can save the world simply by allowing it to save itself. Government red tape, trade regulation, and high taxes distract entrepreneurs from pursuing the traditional business goal of better products at lower prices, and also lead to corruption and economic stagnation. The result is that most citizens remain impoverished.

Editor Alvaro Vargas Llosa, director of the Center on Global Prosperity and a senior fellow at The Independent Institute, points out that, statistically, there is more regulation in poorer countries than in wealthier nations. He suggests establishing looser institutional frameworks in those Third World countries that are "friendly to the process of creating wealth" in order to "harness entrepreneurial activity for the social good." He explains, "Entrepreneurial energy is present in many types of societies, but only in countries with limited government, adherence to the rule of law, and respect for individual rights does this energy foster economic growth."

Vargas Llosa sees entrepreneurship as "a transforming force in the developing world," arguing that other methods, such as foreign aid, simply don't work. He tends to dismiss such concepts as corporate social responsibility, writing, "Many people fail to understand that an entrepreneur who discovers opportunity and transforms resources into wealth provides the most 'social' service possible to the rest of the community, even when that is not the original intention." In other words, successful local entrepreneurs raise the standard of living within the community and provide opportunity to those who live there--and even if those side effects are incidental to the entrepreneurs' goals, they will occur nevertheless. Thus, small local businesses can accomplish what 50 years of foreign aid programs haven't been able to.

Yet, Vargas Llosa's dismissal of foreign aid programs may be overly generalized. For example, there is no real discussion of the burgeoning field of microfinance and of organizations such as the Grameen Bank, Kiva, and the Foundation for International Community Assistance, which provide small loans to Third World entrepreneurs in order to help spur economic growth and alleviate poverty. A growing cadre of economists now view microfinance not as unnecessary market interference, but as a way to create a level playing field.

At any rate, contributors to Lessons from the Poor are generally sanguine about the future. Economists Joshua C. Hall and Russell S. Sobel proclaim that "prosperity is within reach of even the poorest communities of the world."

However, some critics worry that any form of market fundamentalism has the potential to lead to even greater financial inequality. For example, George Soros argues in The Crisis of Global Capitalism (Public Affairs, 1998) that the global capitalist system, characterized by free trade, is disintegrating: "Financial markets are given to excesses.... Instead of acting like a pendulum, financial markets have recently acted more like a wrecking ball, knocking over one economy after another." A free market economy may ultimately lead to societal inequalities, particularly in terms of the distribution of wealth, according to Soros. The question then becomes, would these burgeoning entrepreneurs (who are, after all, acting rationally and in accordance with their self-interest) have a problem with that potential outcome? Soros sees the need for a more sustainable process--a mixed economy--that regulates the global marketplace in ways that truly protect human rights.

Hazel Henderson, author of Ethical Markets: Growing the Green Economy (Chelsea Green, 2007), takes a similar critical view: "The fundamental way to reduce poverty is to stop creating it, which is what the current inequitable global economy and trading system perpetuates. The numbers from the World Bank, UNDP, and elsewhere report that the gap between rich and poor has kept widening for decades." China's recent economic boom provides an interesting counterexample. "They do not have a 'free' market economy, but instead believe that 'markets are good servants but bad masters,'"Henderson notes.

According to Henderson, "China's regulated markets are patterned more on the European model of the 'social market economy.'" Henderson further points out that, in the wake of the subprime mortgage crisis and the collapse of Bear Stearns, even economists on Wall Street (and U.S. Treasury Secretary Henry Paulson, for that matter) "now expect continued government intervention to save deregulated markets from their mistakes.... The European economies are all more regulated than the U.S. economy, and they are doing much better than we are."

Another fear is that a large increase in entrepreneurship in the developing world would not be a sustainable long-term solution in and of itself, and that entrepreneurial growth, left unchecked, would rapidly lead to the further overconsumption of resources and thus to a range of social and environmental ills. Henderson again points to the example of China, which is finally beginning to address the drastic increase in health problems and environmental damage that has occurred since its 1978 economic reforms.