Sunday, April 08, 2007

The Free Market: Friend to Third World, Less Developed Countries

Three recent articles illustrate this:

Writing in the San Antonio Express-News, Jeanie Wyatt writes about Ireland. It is one of the fastest growing economies in the world and is now 4th in the world in per capita GDP. How did they do it? Several factors bu among them are low taxes " The corporate tax rate was 10 percent to 12.5 percent throughout the late 1990s" and "limited government intervention."

New York Times columnist Thomas Friedman had an article about Kenya. The government is getting out of the way to let entrepreneurs set up call centers that are helping the economy. It even did away with the government phone monopoly.

The Wall Street Journal had an editorial called The Mozambique Miracle. You have to be a subscriber to read that one. But here are some exerpts:

""We opened our markets and dropped the centralized economy," says Miquelina Menezes, who chairs the country's association of economists and runs a fund devoted to bringing electricity to rural areas."

"But hyperinflation and a stagnant economy forced leaders of the neo-Marxist liberation movement, Frelimo, to shift their approach. Starting in the early 1990s, the ruling party cut subsidies, opened to outside investment, privatized firms nationalized after independence in 1975 and got a grip on borrowing and the budget. An independent central bank brought inflation into single digits. According to the World Economic Forum's competitiveness index, Mozambique has reformed more than any sub-Saharan African country."

"The payoff is the highest average growth rate, at 8% over the last decade, among the continent's non-oil exporters. GDP per capita is a still tiny $320, but that's compared with $178 in 1992. Since 1997, poverty rates decreased more in rural areas (from 71% to 55%) than in urban (62% to 52%), according to the World Bank. Child mortality has declined to 152 per 1,000 live births from 235. And primary-school enrollment has risen to 71% from 43%. Once a leading recipient of food aid, Mozambique now exports maize, with 5.6% average yearly growth in farming in the last 15 years. Banks, telecom and tourist firms, many from neighboring South Africa, have come in."

"But neighbors in similar straits haven't put in place Mozambique's fixes. Inflation in Zimbabwe is 1,700%; nearby Malawi and Zambia, their economies distorted by subsidies on commodities, are growing haphazardly."


Carl said...

Does this mean that the USA and most of Europe will go into rapid decline because of deficit spending and rapidly growing entitlements that will require higher and higher taxes? Does being the world’s only Superpower and at time the world’s policemen also doom use? Are we to go the way of the Roman Empire? If the answer is YES, what do we do to either stop or slow the upcoming decline?

Cyril Morong said...

The entitlements you mention will certainly be a factor and by themselves have a negative effect on growth. I think the high taxes that may be necessary to pay the entitlements can be a disincentive to work and invest. If that happens it will lower growth rates if not cause an actual decline in per capital GDP. How rapid this will be I don't know. In the long run, devoting resources to military spending is not an investment in your economy. They don't raise your productivity. If we spend too much on that, it can hurt. The big question is is it too much. If we spent nothing on defense, our long term prospects would not look good. We need to spend just enough (like finding the optimal Q for maximizing profits). How much that should be, I have no idea.

Getting back to entitlements, it would be better to have a slight tax increase now than hit the economy with a big increase later. I think people can adjust to small changes over a long period of time. But if all of the sudden taxes jump alot, that can disrupt people's decision making process and resource allocation decisions. With a big tax increase all at once, businesses might start shutting down and cutting back dramatically on investment.