Centuries of countless efforts to reduce poverty have made little progress, particularly in developing countries.
Moreover, attempts to resolve long-festering political disputes peacefully have been unsuccessful in these countries. Both issues come together in tragically torn areas like the Palestinian territories, the Horn of Africa, Yemen, Kashmir and northern Sri Lanka, plus numerous other nations in Africa, Asia, the Caribbean and Latin America.
It is our belief, based on six decades’ commercial and trade experience in developing countries, that a liberal, free-market economic development model can contribute significantly to political conflict resolution at the same time as it socially and economically enriches countless thousands of individuals in the world’s poorest precincts.
We propose that operationally independent commercial and industrial trade zones, basically similar to Hong Kong, be established in select areas of the world. The concept of quasi-independent trade zones is, in fact, one of the few ways that the poorest countries can encourage the spectrum of business activity that creates meaningful economic growth. The Honduran government has taken initial steps to create such a model, an innovative move which can lift one of the western hemisphere’s poorest countries to a position of economic well-being.
Over a third of the world’s population lives on less than $2 per day. Reasons why developing countries remain impoverished include very weak governance, worse education and rampant corruption. The appalling humanitarian situation impacts not just the poor nations: developed countries feel the impact from unmanageably high rates of immigration that strain every aspect of their societies.
Good governance curtails corruption and improves education, delivering greater efficiency, eliminating waste and simultaneously creating wealth. Where the institutions are too weak to support meaningful reform and the government also pursues protectionist trade policies, inefficiency will increase and wealth will wither even further. Trade liberalization, competitive markets and property rights protection accompanied by robust institutions to channel these political and economic forces, are powerful – and proven — means for incentivizing business formation, employment and wealth creation.
Clearly, it is critical to incentivize those in power to change governance models, together with reforming education and curbing corruption. Investors and traders, the lifeblood of economic development, shy away from markets that do not guarantee certain fundamental economic rights — an open and liberal trading system, competitive markets and protection of property. Despite frequent promises, they do not trust developing country governments to provide and enforce these safeguards.
Without such trust, investment and development will not occur. International institutions, including the World Trade Organization, World Bank and International Monetary Fund have focused on this issue since their inception. Admirable progress achieved a 10 fold WASHINGTON 299123v1 2 increase in global GDP between 1947 and 2001, as contrasted with a two fold increase between 1 AD and 1913, according to recent studies by Angus Maddison.
This progress has been achieved by removing obvious barriers, including punitive tariffs and restrictive border measures. Barriers to trade and investment behind the border distort markets and are more pernicious, however. They have equivalent impact as tariffs but are much harder to identify and counter and are particularly difficult where governance is ineffective and/or corrupt.
Simply put, there is a failure of governance in many developing countries. This failure contributes to an economic climate where property rights are not protected, markets are not competitive and inefficiencies abound – all factors which drag on domestic economies and serve to deepen poverty and instability. Far from reform, anti-competitive restraints increase concentration of power and wealth in the hands of an elite, effectively exacerbating unemployment and low wages, and stimulating social unrest. The elites proceed to use their power to control local media and politicians, often interchanging political positions with their own business interests. As this happens, frail national institutions become progressively vulnerable, with governance based on contacts rather than merit. Inefficiency reigns supreme and economic wealth drains from the economy, further damaging it and pushing even more people into poverty.
History demonstrates that the governance problem can rarely be solved from the inside, qualified exceptions including Brazil, Chile, China, South Korea and Vietnam aside. The purpose of this article is to discuss how the solution may evolve.