capitalism

122 Development, Economic
The debt crisis revealed that a lack of capital was not a
problem for the Third World. Rather, economic mismanagement
and the domestic policy environment were at fault.
Highly indebted South Korea did not experience economic
crisis as did highly indebted Latin American countries.
Thus, by the early 1980s, Deepak Lal was moved to declare
“the poverty of development economics.” A worldwide
move to the market slowly began and by the early 1990s
accelerated in pace and scope, including most of the formerly
socialist countries.
The early liberalizers set a pattern of development that
other countries have emulated with varying degrees of success.
From 1960 to 2000, the four Asian tigers maintained
average annual per-person growth rates of more than 5%,
increasing their income by at least seven times, with Hong
Kong and Singapore surpassing the United Kingdom.
Likewise, reform pioneers Chile and China began liberalizing
their economies in the 1970s with notable results.
Chile’s per capita income is now more than 3 times greater
than in 1975, whereas China’s income is nearly 10 times
higher than when reforms began.
The era of globalization has produced other reform successes
in countries as diverse as Vietnam, El Salvador,
Ireland, and Estonia. Central European nations have succeeded
in introducing policies of political and economic
liberalization, putting them on a convergence path with
Western Europe. Yet other countries—in Latin America and
in the former Soviet Union, for example—have had a more
difficult time implementing coherent reforms and sustaining
high growth. Most of sub-Saharan Africa and much of
the Middle East have yet to see significant economic
reform. Mainly because of their economic policies, Africans
are poorer today than they were 30 years ago.
The era of globalization has also renewed an interest in
domestic institutions, such as the rule of law, and other factors
that could explain widely different reform experiences.
The International Monetary Fund estimated, for example,
that if institutions in Africa were brought up to the level in
emerging Asia, African long-term per capita income would
nearly double. The Fraser Institute’s annual Economic
Freedom of the World report—the most systematic longterm
study measuring policies and institutions consistent
with personal choice, voluntary exchange, protection of
private property, and freedom to compete—finds a strong
empirical relationship between economic freedom and
prosperity. Countries that are more economically free tend
to be wealthier and grow faster. That relationship remains
even after taking into account other factors such as education
or demographic indicators.
Poor countries that move in the direction of economic
freedom in a significant way, as China and India have
done, tend to enjoy fast growth and are thus catching up
to rich countries. Annual per capita growth rates of more
than 8% since the early 1980s and about 5% since the
early 1990s in China and India, respectively, have pulled
hundreds of millions of people from poverty and reversed
the centuries-long growth of world income inequality.
Greater economic freedom also is strongly related
to improvements in the range of human development
indicators—longevity, access to safe drinking water, infant
mortality rates, environmental quality, and so on. During
the past several decades, the gap in human well-being
between poor and rich countries has been closing dramatically
and at a faster pace than the gap in incomes. The advantage
of underdevelopment today is that poor countries can
grow at much faster rates than was the case for rich countries
when they were at similar stages of development. Moreover,
for a given income level, countries enjoy notably higher
standards of living than was the case even 30 years ago.
More economic freedom in the world appears to be benefiting
even those countries that have done little to reform.
The development consensus now generally favors marketoriented
policies and institutions that constrain political power
and support market exchange. Although we know that institutions
matter, there is no consensus on how to promote the right
institutional or policy environment. The difficulty that countries
as different as Russia, Argentina, and Malawi have had in
successfully introducing reforms has generated an awareness
of institutional inertia and the role of institutions in shaping
political behavior and seemingly enduring power structures.
Development appears to be more a political than an economic
challenge. The recognition that institutional change
is more complex and occurs at a slower pace than policy
change has led to pessimism among some observers about
the prospects of development in many parts of the world.
Yet precisely because institutional change takes time, such
conclusions may be premature. It took about eight centuries
for the institutions supportive of market exchange and the
rule of law to develop in the West. By contrast, the current
era of liberal reforms is still only a few decades old and
may already be leading to incipient institutional and cultural
change in countries that have recently begun opening
their economies. The 21st century will tell whether the case
for optimism is stronger than the case for pessimism.
The thinking regarding economic development has
matured and has involved a rediscovery of classical liberal
insights into the causes of prosperity. Experts have a greater
appreciation of the limits of development economics and its
ability to forcibly promote growth; of the relevance of the
development path of advanced economies to developing
countries; of the role of local knowledge and of incentives
on individual and entrepreneurial behavior; and of the complex
influence that institutions, culture, geography, history,
political regimes, and other factors exert on each other and
on growth. As such, the study of development has become
qualitative and multidisciplinary, drawing on work from
economic historians, legal scholars, anthropologists, and
political scientists.
Despite those advances, a political push led by international
organizations such as the United Nations and the