Structuring the Economic
and Political Systems of Developing Nations Pursuant to the
Works of Economists Joseph E. Stiglitz and Hernando Desoto I.
Introduction - Why the prosperity of the developing world
should concern us As humans, the
prosperity of the developing world should concern us all. It
is surely in the best interests of all for every human to the
have the opportunity and ability to be a productive member of
society. Welfare is surely not a net sum zero game. As such,
as inhabitants of the poorer nations become more productive
and gain greater ability we will all gain from increased trade,
better technology, and less world volatility. Essentially, the
more persons on this earth who are educated and able to make
a contribution to society, the better off we will all be. Further, we should
all be aware of the immense suffering that continues in our
world today. Many idealists believe that we surely could stop
the majority of this suffering if we only cared to and took
some time away from our rich lives of consumption to do something
about it. While this belief
is surely one filled with compassion, often the political and
economic realities and lack of human capital within each developing
nation can undermine even the best efforts. Therefore, let
us first analyze the state of the debate over how developing
nations can best create an opportunity and prosperity for their
citizens. Second, let us make clear distinctions in defining
the ideas that will shape this debate. Third, let us analyze
critically what is inherently good and inherently bad within
political and economic systems. Finally, let us come to a conclusion
about what prescription developing nations must follow in bettering
the lives of their citizens and in turn creating an improved
world for all members of our global community. II.
The Framework for the Debate Up until recent
time, the leaders and inhabitants of most nations were provincial
and highly focused on their conquests, their survival, and their
self-interests. Only since the
end of World War II has there been tangible action towards creating
a unified world based on providing the chance for all to enjoy
a prosperous life and have access to basic food and health needs.
The 1944 Bretton
Woods Agreement began this process by creating the International
Monetary Fund (IMF) and the World Bank. A year later, in 1945,
the creation of the United Nations was central to furthering
this goal. Finally, in 1947, the first round of the General
Agreement on Tariffs and Trade commenced. This was a crucial
milestone for the promotion of free trade. The debate over
what should be done in developing nations – what ideologies
should be promoted and what policies followed – has not been
without controversy and multiple views, however. III.
The Problem with the War of Ideologies Generally, one
should not be criticized for having a belief and making recommendations
based on that belief. Even if the belief is incorrect, at least
that person is acting in a rational and logical manner. However,
an ideology is not simply a belief. It is a set of beliefs that
are inextricably tied to one another and right in all cases,
not matter what the realities of each certain situation to which
they are being applied. Within the context
of developing nations, the cultural, political, and economic
realities of each country are often very different. It is for
this reason that in most cases it is better not to develop a
standard economic and political prescription and make recommendations
without first analyzing the specificities of each nation. This is the very
point made by Nobel laureate Joseph E. Stiglitz, in his book,
Globalization and Its Discontents. Throughout, Stiglitz
criticized the IMF for giving “one size fits all” standard policy
recommendations to countries without analyzing the actualities
within a country first. He blamed the organization for applying
a neo-liberal belief structure across the board in every situation
without looking at what each country truly needed. Stiglitz blamed
the IMF for confounding the means with the ends. For example,
the IMF would make their goal to liberalize a financial system
without considering if a country had the sophisticated controls
necessary to be able to mitigate effects from the volatile world
market. Other times, the IMF would make their goal to thwart
inflation, and raise interest rates to accomplish this, before
a country even had a chance to take measures to lower unemployment
or create a basic social safety net. These goals, of course,
we in the place of the goal they should have had, to fight poverty
and sustained encourage economic growth within the developing
nations. Another difficulty
is that ideologies must be described using a single word or
short phrase. It is rare that a single word can capture the
complexities of a set of ideas that will provide a framework
for making all potential prescriptions for diverse economic
and political systems. As such, let us
clear up some definitions, make some distinctions, and derive
a non-ideological evaluation of what is inherently positive
and negative within a political and economic system. IV.
What is inherently good? Based on one’s ideology, too many people in this world attempt to oversimplify
our global political and economic systems into the categories
of good of bad. Many will say that democracy is good and
totalitarianism is bad. Many will say capitalism is good and
communism is bad. Others will say that rule by the enlightened
is good and democracy is corrupted by special interests. Others
will say that equality is a worthy goal and capitalism ravages
our environment and destroys our souls. My problem with
most of these analyses on both sides of the ideological divide
is that often these generalizing statements are ideologically
biased and the assumptions that led to the conclusion are not
first outlined. One word terms
cannot adequately describe all the dynamic forces within the
political and economic systems of this world. Rather, let us
make certain distinctions in a process of critical analysis
so we may determine which clearly defined conditions create
results that are inherently good and which create results that
are inherently bad. Clearly there are
good political systems and there are bad political systems.
There are good economic systems and there are bad economic systems.
So what is good? Is Democracy inherently good? I believe it
is not. Rather, democracy is only good under certain conditions.
The proletariat must be educated, leaders must be ethical and
honest, and there must be an active and free press. Is it possible
for an autarchy, rule by few, or totalitarian system, rule by
one to produce better results than a democracy? Under certain
conditions it surely may. Assume in Country
A we have a democratic system that is corrupted by special interests
and selfish motives, no free press to expose this corruption,
no educated electorate to remove unethical leaders. Assume Country
B is controlled by a benign king who has worked diligently to
build a strong governmental team and has selected proper, educated,
and ethical persons for office. Further assume that this king’s
government promotes freedom of speech and equal opportunity,
has talented economic advisors that have promoted free enterprise
and entrepreneurship, and has provided a sense of stability
and security which has led to considerable foreign direct investment
and an increasing GDP with low inflation and low unemployment.
While the above
may perhaps be an extreme example, it surely demonstrates that
democracy does not inherently produce results that will maximize
total welfare. Now, in many realistic cases democracy has produced
very beneficial results. However, this is due to specific conditions
within those countries that are separated from the political
system. Now that we have
given a framework for the debate on how to best create prosperity
in developing nations and have highlighted the fallacy of basing
decisions based on a standard ideologically biased response,
let us state our assumptions and then look at what exactly the
components of a good economic and political system for a developing
country are. V.
Assumptions Before one can
make a prescription for an economic and political system they
must first make normative judgments for themselves as to what
is inherently good and bad about these systems. Before this
can be done, one must state their assumptions and goals. Without
clarifying the underlying pretext of their judgments, much confusion
and endless debate can ensue. This is often because the debaters,
simply have different assumptions and have made different initial
value judgments, yet do not realize it. Therefore, my assumptions
are as such. First, I believe that corruption is bad. Corruption
worsens poverty by distorting political, economic, and social
factors. Second, I believe that there is a role, although limited,
for government to play in maximizing welfare, especially in
the formative stages of a country. Third, I believe every human
has a right to basic health and food needs and the opportunity
to rise above the lot provided to them at birth. Fourth, I believe
that poverty is a terrible thing that we should work towards
eliminating. Now that I have
stated my goals and beliefs, let me make additional judgments
in stating what I would prescribe for developing nations. While
the following is my own work and guidelines, much of the intellectual
context has come from the ideas of Peruvian economist Hernando
Desoto. VI.
A General Prescription for Developing Nations: The Components
of an Effective Political and Economic System First, let me say
that no single prescription will work in all countries. As mentioned
above, each has its own realities that preclude a common solution
from working in all cases. Instead, I hope to provide components
that should be part of each solution, not an overarching prescription
on how to apply them. Here are the components of an effective
political and economic system within a developing nation. 1.
Open and Competitive
market economy Competitive market
economies have shown to be effective in producing high quality
goods at low prices. An incentive system is necessary to get
workers to work and a price system is necessary to properly
allocate a limited supply of resources and goods. Competition
is necessary to keep everyone honest and working efficiently
to produce the optimum output with the minimum input. A government must
also develop laws favorable to entrepreneurial activity and
business and welcome trade with other nations. As a side note,
I am careful to use the term “competitive market economy” rather
than capitalism. While political scientists have made this usage
of this term common, a word that simply means a “belief in money”
leaves much to be desired. Capitalism is an economic term coined
from Karl Marx. It reflects an on-going battle between the proletariat
(working class) and the bourgeoisie (the owners of production). As such, using
capitalism to describe an economic system implies that it is
based solely on the pursuit of personal gain in a zero-sum game
where only classes can prosper, never society as a whole. This
is clearly not an accurate description of the benefits a competitive
market can confer. Further, as capitalism is most closely associated
with the To develop trust
in the government and corporations within the country there
must be transparency in operations. The fewer secretive closed
door meetings the better. Generally accepted accounting standards
must be developed and double-entry bookkeeping should be used.
To encourage transparency
and expose corruption and chicanery a free press is needed.
The government should have no right to censor the press and
the press must have the right to criticize public officials
without feeling endangered. Within a society,
entrepreneurial support networks and economic development groups
should be supported and encouraged. Interaction between
ambitious and motivated individuals is very important in spurring
innovation and developing leaders. Without an educated
citizenry, there will be no way to develop human capital or
key competitive industries with a country. Further, if there
is a democratic political system, elections will not be effective
in selecting the best leaders without a literate and educated
electorate. The state may need to provide support to encourage
education as it is a public good that may not be adequately
provided by the private sector. Human capital is
extremely important as without effective leaders within the
country no progress can be made. The importance
of a proper legal framework within a country cannot be over-emphasized.
Countries must encourage business by developing a contract law.
The right to own private property must be enforced. There should
be few barriers to forming a corporate entity and limited liability
provided for these entities. This will be essential for economic
activity. Further, there
must be a clearly defined set of rules and a body to enforce
and clarify those rules to ensure corruption is dealt with harshly,
and convicted criminals prosecuted. There must also be a system
to judge those fairly who are accused of violating those rules.
Finally, a tax
code must be created and enforced fully and fairly. The government
must have revenues to be able to operate. Some government
funds must be used to create transportation, water, sewage,
electrical infrastructure. Since these are public goods they
often will not be provided in adequate supply by the private
market. Insurance must
be available to protect individuals, families, and businesses
against the risk of catastrophic loss. ` An insured banking
system must also be created to provide an effective vehicle
for turning consumer savings into economy-expanding investments.
Finally, company
stock exchanges that that promote, protect, maximize and employ
savings efficiently must be created. Even if all of
the above criteria are fulfilled, a system may still collapse
if corruption is present. Corruption is simply the byproduct
of a lack of ethics among participants is a system and includes
activities such as bribery, fraud, and other illegal behavior.
Corruption is present
in all systems. It was surely present in the state-controlled
U.S.S.R. and is present today in the Corruption can
be discouraged with intelligent laws, regulations, oversight
and the inherent positive properties of the market coupled with
democracy such as transparency, freedom of the press, and a
better educated proletariat, many of the same principles outlined
in prescriptions one through eight. Adam Smith, in his 1776 work, The Wealth of Nations,
argued that the capitalist system won't work without moral cooperation.
No system will. There must be proper, equitable regulation of
financial industries and industry that creates negative externalities
and a sincere commitment to end corruption, cronyism, and nepotism. VII.
Summary In summation, the
lot of those in developing nations should concern us all. We
all benefit as the poor of the world are provided with opportunity
and develop increasing ability, and productivity. Much progress has
been made since 1945 with the development of International Monetary
Fund, United Nations, General Agreement of Tariffs and Trade,
World Bank, and World Trade Organization. However, there
are multiple opinions and there is much debate over exactly
how to help developing nations fulfill their potential and provide
hope to their citizens. A problem with
many prescriptions for developing countries, however, as Joseph
Stiglitz points out in his book, Globalization and Its Discontents,
is that global organizations such as the International Monetary
Fund often give one size fits all recommendations without critically
analyzing the specific realities of each country. Further, often
these recommendations are based solely on ideology and not on
the specific factors of a situation. In making a true prescription,
one must first state his or her assumptions as to what results
are being sought and what tenets they wish the solution to have.
Then, one may move forward in giving recommendations. Hernando Desoto,
a prominent Peruvian economist, has made great progress in defining
the specific elements of a successful society. These include
an open competitive market economy, transparency, a free press,
development of economic networks, an educated proletariat and
development of human capital, an effective rule of law and justice
system, infrastructure systems, financial systems, and a fierce
anti-corruption stance. Following these
recommendations and providing for significant time for the development
of human capital, leadership, legal and financial systems, and
industry a poor country will have a good chance at developing
into a competitive economy that is able to provide its citizenry
with jobs, education, and a chance at a good life. We must work
diligently towards these ends. Comments
on this article are welcome in the Discussion
Forum. RETURN TO: The
Economics and Policy Resource Center
Ryan
Allis
Structuring
Developing Nations
All
Levels
by Ryan
P. Allis
Ryan Allis, 19, is an ebusiness marketing consultant and a student
at the University of North Carolina at Chapel Hill majoring in
business and economics. He is the founder of www.zeromillion.com,
the founder of The Entrepreneurs Coalition, a non-profit organization
dedicated to building an international network of entrepreneurs,
and CEO of Virante, Inc., a North Carolina based software development
and ebusiness consulting firm [ learn
more ].
