Left Out of the Capitalism Game
Despite new riches, why are many developing countries not players in the capitalist market?
July 7, 2001
Capitalism is in crisis outside the West. This is happening not because globalization as such is failing, but because developing and former communist nations have been unable to “globalize” capital within their own countries. Most people in those nations view capitalism as a private club, a discriminatory system that benefits only the West and the local elites who live inside the bell jars of poor countries.
Latin Americans do not have to be reminded. On at least four occasions since their independence from Spain in the 1820s, they have tried to become part of global capitalism — and failed.
They restructured their debts, stabilized their economies by controlling inflation, liberalized trade, privatized government assets (selling their railroads to the British, for example), undertook debt equity swaps and overhauled their tax systems.
At the consumer level, Latin Americans imported all sorts of goods, from English tweed suits and Church shoes to Model T Fords. They learned English and French by listening to the radio or records. But they never produced much live capital.
We may now all be benefiting from the communications revolution, and some may see progress in the fact that the Egyptian Sphinx now stares directly at the neon sign of a Kentucky Fried Chicken franchise. Nevertheless, only 25 of the world’s 200 countries produce capital in sufficient quantity to benefit fully from the division of labor in expanded global markets.
The lifeblood of capitalism is not the Internet or fast-food franchises. It is capital. Only capital provides the means to support specialization — and the production and exchange of assets in an expanded market. It is capital that is the source of increasing productivity and therefore the wealth of nations.
Yet, only the Western nations and small enclaves of wealthy people in developing and former communist nations have the capacity to represent assets and potential and, therefore, the ability to produce and use capital efficiently. Capitalism is viewed outside the West with increasing hostility, as an apartheid regime most cannot enter.
There is a growing sense, even among some elites in developing countries, that if they have to depend solely and forever on the kindness of outside capital, they will never be productive players in the global capitalist game. They are increasingly frustrated at not being masters of their own fate.
Ten years ago, few would have compared the former Soviet bloc nations to Latin America. But today, they look astonishingly similar: strong underground economies, glaring inequality, pervasive mafias, political instability, capital flight — and flagrant disregard for law.
That is why outside the West advocates of capitalism are intellectually on the retreat. Ascendant just a decade ago, they are now increasingly viewed as apologists for the miseries and injustices that still affect the majority of people. For example, in 1999 Egypt’s consultative upper house warned the government “not to be deceived longer by calls for capitalism and globalization.”
Having forgotten the crucial issue of property, capitalism’s advocates have let themselves become identified as the defenders of the status blindly trying to enforce existing written law whether it discriminates or not.
The promoters of capitalism, still arrogant due to their victory over communism, have yet to understand that their macroeconomic reforms are not enough. We must not forget that globalization is occurring because developing and former communist nations are opening up their once protected economies, stabilizing their currencies and drafting regulatory frameworks to enhance international trade and private investment.
All of this is good. What is not so good is that these reforms assume that these countries’ populations are already integrated into the legal system and have the same ability to use their resources in the open market. The unfortunate fact is that they do not.
Hernando De Soto
President, Institute for Liberty and Democracy Hernando de Soto is president of the Institute for Liberty and Democracy (ILD), the Lima, Peru-based think tank that advocates for property-rights reforms in developing nations. He was chosen as one of the five leading Latin American innovators of the century by Time in its special May 1999 issue […]