... Neither Is the State; A Dissenting View: Efforts to Drive Development and Smooth out Income Disparities by Fiat Have Proved to Be Far Less Efficient Than the Market. What's Needed Is More Reform, Not Less

By Foroohar, Rana | Newsweek International, December 26, 2005 | Go to article overview

... Neither Is the State; A Dissenting View: Efforts to Drive Development and Smooth out Income Disparities by Fiat Have Proved to Be Far Less Efficient Than the Market. What's Needed Is More Reform, Not Less


Foroohar, Rana, Newsweek International


Byline: Rana Foroohar

Yes, spreading wealth more evenly around the developing world would be a good thing. The question is whether those governments could do more for the poor by staying well out of things. Consider India's new public-works program, designed to put hundreds of millions of the country's most downtrodden people to work building much-needed roads, bridges and canals. It's a great idea, in theory. But in practice, wage proposals for India's "new deal" are coming out much higher than expected, and development economists already fear it may become a costly handout ripe for fraud and corruption. If so, it won't be the first time that socialist good intentions went awry. Just look at the politics of water in India. Costly government subsidies restrict supply, turning access into a political tool. Water flows to richer areas--the poor end up buying it from vendors for quadruple the metered rate.

That's the problem when governments intervene in free markets. Too often, they end up hurting those who most need help. As any economist will tell you, free and open markets are ultimately good for the poor. In East Asia, for example, the percentage of people living on less than $2 per day has fallen from 50 to 32 percent over the past decade, in large part because of deregulation, liberalization and freer trade. Growth--and, consequently, poverty reduction--has mostly been about governments getting out of the way of business. But the developing world still has a long way to go. Despite their pools of cheap labor, Asian economies are among the world's least accommodating places for business, according to the World Bank's "Doing Business" report. (It's easier to start a new business in Iran than in India or Indonesia.) Corruption and red tape are rife, and states prop up sclerotic nationalized companies and restrict foreign ownership in many sectors. Tariffs on many products remain high, even though the bank says that Asia has more to gain than any other part of the world from further trade liberalization. "What Asia needs is new reforms, not a new deal," says Columbia professor and trade expert Jagdish Bhagwati.

While the protectionist politics of agriculture in the United States and Europe is holding up further progress on the Doha round, it's worth remembering that 70 percent of tariffs paid by developing countries are paid to other developing countries. Asian countries for example, could begin helping their poor by lowering regional tariffs on key products such as rice. This isn't easy because in most countries, agriculture is a highly sensitive issue. But the consequences of the trade status quo are high, because when rice prices go up, so does poverty. In Indonesia, for example, growth has been lagging for years in part because of an absolute ban on foreign rice. "Indonesia should use cheaper rice from Vietnam, Thailand or India to fuel diversification into higher-end products like meat and poultry," says Peter Timmer, a senior fellow at the Center for Global Development in Washington, D.C. Instead, the government continues to subsidize its own less productive growers. The reason is no surprise. Rice farmers are the largest identifiable voting bloc in the country.

As Indonesian politicians should already know, subsidies ultimately carry a high cost. The country was forced to dismantle its own fuel-subsidy program recently when rising international oil prices pushed costs so high that they triggered a fiscal crisis. …

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