by Jon Basil Utley
Ladies and Gentlemen, I've lived in many nations. All kinds of nations with all kinds of backgrounds and religions and philosophies have prospered with free markets. The lessons are absolute, the rules are simple, and the examples are many.
The best and fastest successes have been from Asia, but Latin America is more democratic and also offers lasting insights.
Look then too at China. The common wisdom used to be that Chinese couldn't develop, that their religion was too passive and fatalistic, that they were too dishonest and gangster ridden. In Latin America the great economist Hernando de Soto wrote 10 years ago in his classic study of Latin American economies, The Other Path, "It's not that we just want to sit around and play guitars all day, it's just the economic system we have that saps initiative and makes us poor." Yet in the early l960's Latin America had more economic growth than Asia. Then Asia adopted free markets and Latin America adopted socialism and the rolls reversed. Today we hear how Buddhist values of self-control and will power are ideal for capitalism.
There's a good argument that it was Washington's foreign aid, for fear of Cuban communism, which set back Latin America. It then subsidized and so reinforced the worst statist tendencies of the Latins, as well as funding vast corruption. But that's another story.
In Southeast Asia, Thailand and Malaysia and Indonesia are tropical lands with strongly different ethnic minorities and religions, mixtures that bring chaos in many nations, yet their economic success has resulted in subduing ethnic differences and in all getting along together. In Indonesia they don't even have a word to say "NO." All the old rules argued that capitalism and free markets couldn't not work in such lands.
The rules are known--they've been proven everywhere. Not everything has to be done right all the time; modern free market capitalism is so incredibly productive that even inefficient economies can still go on functioning at a low level. But there is no middle way, I know many here in East Europe look to Sweden or Germany as models, but both are failing. The Geneva based World Economic Forum showed that Germany had lost its premier standing and slipped to 25th place in competitive ratings. It's lost 500,000 jobs during the last year and pays out $100 billion yearly in jobless benefits, while its investor flee to other nations. Today England and Holland are far better example of successful economic policies.
Before Asia's dynamism economists didn't believe that such record growth rates were possible on the face of the earth, 7% a year back to back, year after year after year. In Korea it was 9%. In Taiwan exports increased by 28% a year every year for 10 years between 1963 and 1972. Entire cities changed from being stagnant backwaters into becoming some of the most dynamic in the world.
It was Hong Kong and Chile which made the breakthroughs. Chile was the first to dismantle a statist economy and rid itself of economic irrationality and poverty. One has to go back to the reconstruction of Germany after the Nazis for an earlier example. In Asia, Taiwan and South Korea saw Hong Kong with no natural resources except a hungry people, a stable currency and the rule of law, becoming an economic dynamo, while their economies barely struggled along with high taxes, "planning" and small import substitution industries, reflecting the wisdom of the times. All the conventional wisdom was socialist and the media only varied from being moderately leftist to far leftist. Washington's philosophy and support was for welfare state socialism as the only alternative to communism. But it was not, Private property and free markets are what changed Asia.
In Chile the whole world was against General Pinochet's regime, after it ousted the marxist Allende. The United States cut off all aid. Chile was politically isolated except for the support of a small group of free market University of Chicago economists, called the "Chicago Boys". These were pioneering free market economics and Chile became their model. Its subsequent tremendous economic prosperity gave its people the highest standard of living in Latin America and its dynamic economy became the example for all other Latin Americans.
Following are the basic rules for prosperity.
No. 1 is a Rule of Law and Property Rights--it sounds simple that people work best when their property is secure, but it's the first rule violated in most of the world. And not just for the rich, but particularly for the poor, whose property rights are the most insecure. Hernando De Soto's pioneering studies of Peru, The Other Path exposes situations typical of many nations. He showed how impossible it was for the poorest peasant or homeowner to gain legal ownership title to land, property or a business. He showed how setting up a small business in Peru and much of Latin America, legally, took months of time and over a thousand dollars of cost, compared to about $50 for an American in Florida. Consequently half the Peruvian economy was operating illegally.
Later I heard De Soto speak of visiting Indonesia where the government had contracted him as an advisor. He spoke about the same problems there concerning defining land ownership. Mexico had the same problems of missing property rights on the land, indeed it was even worse with a system of collective farms where peasants rotated farming the best land. Consequently they had no incentive to care for the land, but rather overfarmed it of all its nutrients before abandoning it for the turn of another family.
A reliable legal framework is necessary to promote domestic and international investment. It's the only way for citizens to have the "long term" view necessary for economic development.
In the United States officials must swear allegiance to the constitution rather than to the nation. Nothing better shows why the rule of law is paramount in the United States.
No.2 is agriculture. If everyone has enough food, good health and optimism follow, both necessary for investment and hard work. Every single prosperous nation in Asia and South America gave priority to agriculture. Those that neglected or destroyed their agricultural base (like Argentina under General Peron and Peru when I lived there) became poor. Argentina was, before Peron, one of the richest nations in the world. He overtaxed and ruined its agriculture and destroyed its prosperity.
Japan, South Korea, Taiwan and communist China all first made their farmers prosperous. In Japan land reform came from the American occupation; in South Korea 900,000 peasants were given title to their land after the Korean War. In Taiwan the old nationalists who took over after losing China were most conscious of gaining favor from the native Formosans and made a far-reaching land reform. In Thailand I drove all through much of the nation ten years ago, everywhere I saw prosperous looking peasants with pickup trucks and shiny, new farm machinery. Indonesia used rice and fertilizer price policies to raise rural incomes. And in communist China the first free market reform was giving peasants security and profit for their work.
Agricultural development was so important that the World Bank reported, "agriculture's share of gross output and employment has declined most and fastest where total agricultural output and productivity have also grown the most." That is industry grew faster in nations where agriculture was a priority. This is because a prosperous agricultural sector then creates all sorts of new demands for local industries from machinery and vehicles to light manufactures and service industries.
The World Bank study, The East Asian Miracle, also shows how wages were very similar for peasants and for industrial workers. This had the important advantage of keeping people on the land until, not before, there were jobs for them in the cities. In Latin American it was different with the result that peasants went to become the unemployed masses living in misery in the cities.
No. 3 is low taxes and a stable currency to encourage savings. Everywhere citizens want to better their lives and their children's' lives. High rates of domestic savings (around 30% or more) were a key to all of Asia's growth rates. Interest rates on savings must be positive, above the rate of inflation, or savings make no sense. People aren't stupid, they won't save if their governments destroy their currencies with hyper inflation. In Taiwan interest on savings left for 2 years or more was untaxed. High domestic savings also serve to make a nation less dependent upon foreign capital.
Tax rates of up to 16% on most incomes are what helped make Hong Kong such a success. High rates either paralyze an economy or drive it underground. This again sounds simple, but Asian and Latin tax rates used to be very high in their times of stagnation. Until Reagan came along expounding free market ideas, Bangladesh and India, for example, had tax rates of about 60% on incomes of only $3000 per year. But foreigners in Bangladesh paid only a 30% rate, as if foreigners were the only ones who could create wealth in a nation.
Wealth creation was a new concept to those 3rd worlders steeped in Marxist theories that wealth was a constant and the only question was how to divide it fairly. Today wealth is created by a nations' own citizens. Of course natural resources have value, but the computer chip is made from sand, wealth comes from human brains and the ingenuity of a nation's own citizenry, not from the outside. In South America I remember thinking how they thought there were only 3 origins of wealth, from on the land, under the land (minerals) or from foreign corporations. Only very recently have they understood the necessity of laws allowing the mobilization of their own citizen's capital and initiatives.
No. 4 is education. All the Asian nations have heavy investment in basic education. Subsidies for education were the substitute for income transfers common to welfare states. Economic rewards came to those who studied, worked and saved; education was the mechanism for upward mobility. The Ukraine already has this key advantage, because every foreign investor today needs a well-educated work force.
No.5 is entrepreneurial activity, This is the magic for development and prosperity and the way to opportunity for the poor and less educated. Entrepreneurs don't need great education; in fact De Soto in Peru points out how many were illiterate peasants, but they are the men and women with the spark, the hunger for recognition and success, the ability to motivate others, to raise capital and to work the incredible hours necessary to get a new business off the ground. Every nation wants new "high tech" industry, but you can't have "high tech" without "low tech" as well, which comes from giving freedom to those who create simple businesses and services. Manufacturing is a declining source of labor demand; in the United States it uses only 17% of the labor force. Most future jobs are in services and such activity makes the nice restaurants and conveniences which attract well paid super technology workers. They are what can make life comfortable.
The number one priority of Government and what it can do well is to provide modern infrastructure and communications, ports and roads. The government should invest is facilitating exchange of knowledge and goods within a nation. Knowledge is all-important and everything which spreads it. Always there is feedback and cooperation between government and business. Not only for information transfer, but as a way for people to argue out different points of view. Like in the United States, there are many business and social associations in Latin America and Asia. Foreign study and foreign travel is always worthwhile. There are now 100,000 Chinese students studying in the United States.
Equally important is trade and the discipline of competing in international markets. They are a primary reason Asia became so advanced so fast.
No. 6 is labor. The Southeast Asians have had little of the labor-capital strife that marks so much European history. They worked together for their national good. This was possible because labor saw its real income level rising fast. In 20 years they went from the abject poverty of Asia to a level compared with Western Europe. In Taiwan they went from 6% of United States' wages in l975 to 43% in l995, in South Korea from 5% to 43%, in Singapore from 13% to 43%. The Asian city-states, Hong Kong and Singapore, provided large investments in public housing for the majority of their citizens, something that gave workers an immediate stake in the benefits from economic growth.
In Latin America labor unions were a negative force often dominated by Marxists urging their governments to pursue the very statist policies which prevented rapid economic growth. Typical of what stymied them in the past were laws such as in Bolivia and Peru preventing any laying off of workers after 90 days work. In Peru companies would hire for only 85 days and then dismiss most of their labor force, while keeping just a core of staff to train the next group of 80-day hires. The problem again was that Latins thought new wealth creation came only from foreigners who also would exploit their nations. A typical story of the way it used to be-- In Bolivia in the 70's a group of American pilots invested in a factory to manufacture batteries. Business was good and they hired more workers. Then business was bad and they wanted to dismiss some of the excess workers. The law wouldn't let them. After losing money for a year they abandoned the factory. The workers tried to run it themselves for a few months, but couldn't and then they all lost their jobs and Bolivia lost its battery industry.
Large transnational corporations sometimes could carry on with such laws wanting to stay for the long term potential and able to shift production between different nations to keep workers busy. But small business and entrepreneurs, the dynamo of modern capitalism, couldn't.
New small industries and services can only grow where entrepreneurs can "hire and fire" easily. This is absolutely critical to generating large numbers of new jobs in labor-intensive industries. It is the only way other than the "make work" waste of labor typical of the old statist economies.
A very poor substitute is possible with the illegal underground economy. In Peru and Argentina 50% of economic activity used to be such. In Europe Italy does better than much of Western Europe (which is paralyzed by so many labor laws and multi-industry union domination) because much of its economy is "off the books." However, this is basically inefficient because "illegal industry can't get credit and so much management time and money and effort must be spend in bribing the police and government inspectors.
In Mexico it has been the "maquiadoras," assembly industries along the border of the United States, which fulfill the roll by being free of many Mexican labor restrictions. They've grown at a rate of 25% per year for over 20 years starting in l966. They serve as the example for the rest of Mexico about what kind of growth is possible without labor market restrictions.
Korea and Singapore did early on repress wages. The consequences were the growth of powerful unions in Korea and labor shortages in Singapore. Hong Kong was freest of labor laws and without restrictions on union activity. It had the best growth of incomes and jobs of all the nations. The Asian governments prevented industry wide unions, such as exist in Germany, in favor of company ones. Above all it was the rapid growth of the demand for labor from the growing economies which held off the destructive types of labor unrest and job destroying unionism which have paralyzed so many nations. Also common is a base wage and a bonus depending upon a company's fortunes.
No. 7 Concerns Bureaucracy and Economic Planning. Good planning is like good dictatorship, almost impossible to find. So it is with planning; competent and honest planners are too scarce to be trusted with running anything as complicated as a national economy. The Japanese and Koreans were originally successful "planners." They went to extraordinary lengths to insulate their bureaucracies from democratic pressures. Key government officials were paid very well, equivalent to earnings in the private sector, salaries over the 100,000 dollar range are not uncommon in Asia for top administrators, especially in banking and financial policy areas. But now their great problems are because of letting planners stymie the free markets. Japan is proving to have been amazingly corrupted.
South Korea did use central planning to favor certain investments; Officials decided upon steel making and cars, yesterday's industries, among the most difficult and competitive in the world. Korea now has 5 auto manufacturers; it's newest steel mill company just went bankrupt and its industry has tremendous debts, on average earning profits at a rate of barely 1% on invested capital. According to the World Bank study Korea had the lowest level in its adaptation to new technology index, compared to Hong Kong which, without any planning or direction, had the highest, 5 times that of Korea.
There's a simple reason for these errors. Government officials will always choose conventional wisdom, which is always the wisdom of the past. But businessmen will take chances on new ideas and new technology. Many will fail, but some will bring forth great new industries. Only an entrepreneur who has the possibility of making a large profit will risk money or even ridicule by starting new ventures. Government officials only do what is conventional and usually fight yesterday's battles.
For Germans and Japanese planning has worked at times, but for most nations, including very much the United States, plain old free markets do better. The Latins with more democratic economies have spared themselves from much planning.
Where planning and government investment is important is in infrastructure to help utilize a nation's basic strengths. For example-- to help high tech industry, good communications are essential, --for agricultural development, good roads and port facilities, --to create jobs, a nation needs laws which favor labor intensive industries, and so on. Taiwan's planning was of this kind only in education and infrastructure and stable monetary policies, not in favoring certain industries above others. The consensus is that some planning may be good in the early, simple stages of development, but never thereafter.
For financial policies there were restrictions on outflows of money and stiff taxes on imports of luxury goods. Malaysia and Singapore compelled high rates of savings. And all the successful nations had positive rates of interest on savings accounts, that means over the rate of inflation. Also the governments controlled the spreads that banks could charge borrowers over the interest rate they paid their savers. Another practice was adopted years ago by Chile, that of only accepting foreign loans and investment, subject to a minimum year's period of time. This protected them from the "hot" money rushing in and out like happened to Mexico and now to some of the Asians.
What Went Wrong Now in Asia--they broke the rules, when they were struggling and poor they well understood the importance of limited government and quick response to economic conditions. Now lower cost competition from mainland China, too much concentration in traditional manufacturing (urged on by government officials) and excessive inventories (bad planning) led to a classic slump, exaggerated by loose banking supervision. Their economies ran ahead of their political and institutional growth. But Asians today have in place a vast and modern valuable industrial base, where before most lived in primitive misery. Now they need more democracy and greater consumption of their own manufactures. Taiwan and Hong Kong, with some of the least planning, which followed the proper rules of economic freedom, have suffered the least from the Asian crisis.
The Latin Americans, after the Mexican peso collapse, have strengthened their banking structure and today are less vulnerable to such excesses as in Asia. Latin America was and is also more democratic. Although there is argument for the more authoritarian Asian model during the early stages of development, it's shown itself susceptible to corruption, waste and bad planning as economies become more sophisticated. The Latin economies are more politically advanced democracies than the Asians. They may in the long run be more stable.
I hope I have shown an overview of what lessons can be learned from the Latins and Asians to contribute to reform and prosperity in the Ukraine.
The East Asian Miracle, Economic Growth and Public Policy, published by the World Bank in Washington and Oxford University Press
The Capitalist Revolution in Latin America by Paul Craig Roberts and Karen Lafollette Araujo, Oxford University Press, l98 Madison Ave., New York 10016
The Other Path, The Invisible Revolution in the Third World by Hernando de Soto, Harper and Row publishers, 10 East 53rd Street, New York 10022
1998 Index of Economic Freedom, by Johnson, Holmes and Kirkpatrick, Heritage Foundation, 214 Massachusetts Ave., NE, Washington, D.C. 20002
The Way the World Works by Jude Wanniski, Simon & Shuster, 1230 Av. of the Americas, New York 10020
Atlas Economic Research Foundation An excellent INTERNET source for free market information
Research Assistant: William Utley
* Text from a lecture delivered in 3 major Ukrainian cities at conferences sponsored by the American Foreign Policy Council. Published in Ukrainian by the Center for International Private Enterprise