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ROHAC AND TUPY: Pocketing the keys to prosperity
Free-market foes would withhold growth tactics from poor nations
The economic crisis that began in 2008 eroded public confidence in free markets — unjustifiably, in the minds of many — and set U.S. policy squarely on a path of increased financial regulation and governmental tinkering in the economy. Contrast this with many developing nations in Africa, where free markets have enjoyed something of a renaissance even after the downturn. The U.S. recovery has been painfully slow, while Africa’s economy is once again booming at a rate of 5.4 percent — even greater than before the crisis.
Despite ample evidence that pro-market economic policies are an important motor of development, the spring meetings of the World Bank and the International Monetary Fund brought worrisome signs that support for free markets is flagging even further. For better or worse, Western politicians and aid agencies have significant leverage over policies in the developing world, and their actions affect millions of poor people around the planet.
Over the past decade, the world’s poorest continent, Africa, made tremendous economic progress. The real gross domestic product rose at an average annual rate of 4.9 percent between 2000 and 2008 — twice as fast as that in the 1990s. In the aftermath of the financial crisis, African growth slowed to 2 percent in 2009, but it has since returned to pre-crisis growth rates.
In part, Africa’s growth has been driven by the rise in commodity prices. However, according to a McKinsey report on Africa’s economic development, “resources accounted for only about a third of the newfound growth. The rest resulted from internal structural changes that have spurred the broader domestic economy.”
What exactly happened? Inflation was reduced by more restrained monetary policies on the continent, from an average of 22 percent in the 1990s to 8 percent in 2000s, budget deficits and public debt were reduced, and many countries also embarked on a program of trade liberalization and privatization. These reforms were often accompanied by tax cuts and changes of the legal and regulatory environment, which reduced the costs of doing business.
Now, the extraordinary economic progress of the developing world, and of Africa in particular, is under threat because the intellectual consensus in favor of markets is wavering among Western policymakers and the aid industry.
Even Jim Yong Kim, the head of the World Bank, once sounded like a skeptic of pro-growth reforms. “Even where neoliberal policy measures have succeeded in stimulating economic growth, growth’s benefits have not gone to those living in dire poverty,” Mr. Kim wrote in a 2000 book, titled “Dying for Growth: Global Inequality and the Health of the Poor.” The publication sings the praises of Cuba’s health care system, which, he writes, “prioritizes social equity.”
Pro-growth projects at the World Bank, most notably the Doing Business project, which measures the quality of business environments around the world, have been under ideological attack from organizations such as Oxfam for a long time. Under Mr. Kim’s leadership, an independent review of Doing Business has been announced, led by a former South African finance minister, Trevor Manuel. The review has given the groups skeptical of the project a unique opportunity to either derail the project or strip it of its analytical teeth.
Since its inception 10 years ago, the Doing Business project has provided a focal point for governments of emerging economies, which were trying to improve their business environments. Through a comprehensive set of reforms, Rwanda climbed from a rank of 150th in the 2008 edition of the Doing Business report to 52nd in 2012. Aggressive reformers, such as Mauritius, Rwanda and Georgia, not only saw significant economic growth, they also saw dramatic improvements in governance and a decline in corruption.
A joint submission prepared for the review panel ahead of the spring meetings by a group of nongovernmental organizations, including Oxfam, Christian Aid and Save the Children, seems oblivious to this evidence. Flatly asserting that the Doing Business project does “little to achieve the livelihood ambitions of poor entrepreneurs or to achieve the development imperatives of the World Bank,” these organizations demand that the World Bank and other donors stop using Doing Business as a benchmark for assessing countries’ institutional environments.
However, the observed decline of poverty in the developing world, from half of its total population in 1981 to just 21 percent in 2010 — all in spite of a 59 percent rise in its population — would have been inconceivable without the “neoliberal” reforms in poor countries that have been lambasted by the aid industry and intellectual allies of Mr. Kim, an appointee of the Obama administration. Reversing this progress would be an unspeakable human tragedy.
Dalibor Rohac and Marian L. Tupy are policy analysts at the Center for Global Liberty and Prosperity at the Cato Institute.
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