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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 United States and western values, this implication makes the jobs of those spreading anti-American and anti-western messages all too easy.

  1. Transparency

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.

  1. A Free Press

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.

  1. Development of Economic Networks

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.

  1. Educated proletariat and Development of Human Capital

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.

  1. The Rule of Law and Proper Justice System

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.

  1. Infrastructure Systems

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.

  1. Financial Systems

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.

  1. Fair Societies

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 United States. Some persons believe that state-controlled economies create corruption. Others believe that opposite side of the spectrum, unregulated purely market based economies create corruption. Although differences in system may encourage more or less corruption, neither ideological system itself creates corruption. A lack of integrity among some participants will always be present. Rather, it is the way the system is applied and the rules within that will encourage or lessen corruption, however.

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.



This Entrepreneurship article was written by Ryan P Allis on 2/9/2005

Ryan P. Allis, 20, is the author of Zero to One Million, a guide to building a company to $1 million in sales, and the founder of Ryan is also the CEO of Broadwick Corp., a provider of the permission-based email marketing software and CEO of Virante, Inc., a web marketing and search engine optimization firm. Ryan is an economics major at the University of North Carolina at Chapel Hill, where he is a Blanchard Scholar. [learn more.