New millennium offers greater freedom

By Christopher Lingle

GUATEMALA CITY (JP): There are many reasons to believe that the new millennium will usher in a period of rising living standards and greater overall freedom. This positive outlook is supported by the experience of emerging economies in Asia and Latin America as well as the transition economies escaping from the disasters of authoritarian socialism and communism.

What has been learned is that the process of globalization has been the most effective liberalizing process in the history of mankind. Such a claim might cause Karl Marx to roll over in his grave and cause apoplexy among his diehard disciples. But history speaks for itself. International capital flows and greater trade integration over the past three decades has lifted nearly half a billion people out of poverty, mostly in Asia.

Global trade and capital flows are forcing governments to be more accountable to their people. Where markets are most open, the productive instincts of their people have been unleashed while entrepreneurs have created wealth and new jobs.

Many despotic governments in Latin America and Asia have given way to more democratic leadership that is embracing the mantra of market economics.

Some governments, such as in China, hope to introduce market reforms while holding back political reforms. Time will tell whether this is a disastrous course. China's apparent success in its approach to reform compared to Russia's is likely to be reversed within a decade. Russia will make considerably more progress while China will lag behind. This is because leaders in Moscow must begin building the institutional structures to pull out of a deep economic malaise. In order to become integrated into the global economy Russia must introduce (at last) private property rights and a system of law to enforce these rights. Abiding by the rule of law under the eyes of an independent judiciary will provide support for a "contract culture" that is the basis of modern market-based economies.

Unfortunately, China continues to rely upon two entrenched "institutions" : the People's Liberation Army and the Communist Party. Due to the entrenched inefficiencies and distortion introduced by central planning, the industrial sector of China's economy is mostly state-owned and is highly inefficient. These state-run enterprises are on a lifeline of gifts from the state banks that are disguised as loans. Now the percentage of non- performing loans has reached about one-fourth of total loans. If this continues, it will cause a banking crisis. If the loans are not continued, then there will be a social crisis due to the massive numbers of workers that must be made redundant.

Although China is likely to suffer, the expansion of economic freedom as the basis of promoting political freedom elsewhere will continue, as there is a shift from centralized or authoritarian economies towards free markets. Under these conditions individuals will react to changing incentives to work and earn profit.

Many of the other emerging economies offer relatively low wages relative to education levels as well as a strong work ethic. (Watch Cuba become the Hong Kong of the Caribbean!) An increasingly open global trading system will allow more rapid technology transfers while free capital movements will aid in economic development. As the incomes of the emerging economies rise, they will become a source of export income for the more developed economies in North American and Europe. At the same time they will be able to increase their savings and provide a domestic source of capital that will make international markets more efficient, driving down the cost of capital.

While there will be adjustment costs, there will be considerably more benefits accruing to most people in most countries. Most of the losers will be workers or owners in previously protected industries whose privileges cost consumers in the form of higher prices and meant that newcomers to the labor market found fewer jobs.

A lesson of the global economy is protectionism is wrong not so much for the distortions and inefficiencies that it always caused. Protections for domestic industries are immoral for stealing job opportunities from the young. Fewer restrictions on trade and capital flows will give coming generations real cause to be hopeful for their future.

The writer is an independent corporate consultant and Visiting Professor at Universidad Francisco Marroqumn in Guatemala.