The real challenge
Formal-sector jobs make a difference: sorting cashmere wool in Ulaan Bataar.
Without private-sector development, poverty cannot be eradicated. Only market-oriented businesses will ever generate the kind of jobs that are needed to provide gainful employment to masses of people. It is also well understood that competition is an engine of innovation. No, market forces do not manage every kind of innovation well on their own, but the track record of governments implementing innovation by fiat is dismal.
These are only two of the reasons why markets are indispensable if a society is to prosper. They do not prove, however, that market forces should be left to themselves, as free-market orthodoxy demands. The global financial crisis of 2008 provided ample evidence of just how devastating market failure can be. Private-sector banks had lent too many people too much money without assessing thoroughly whether the clients would be able to repay. Far too many clients used the loans for real-estate investments. House prices were inflated in places as far apart as Spain, Ireland and California. Smart brokers, moreover, designed securitisation schemes that were supposed to make risky investments safe. There was no safety, however. Market speculation turned into a gigantic pyramid scheme that eventually had to collapse. And when it finally did collapse, it plunged the world economy into crisis.
Environmental protection is probably the policy field that best shows that both is needed: prudent regulation and private-sector dynamic. Unregulated markets cause unlimited environmental damage. Accordingly, governments must restrict destructive business practices. On the other hand, the history of the Soviet Union and other centrally planned economies shows that capitalist economies were better at tackling ecological challenges.
Anti-corporate agitators respond to this argument by pointing out that big business is guilty of unsustainable practices in developing countries in sectors such as resource extraction or industrial-scale agriculture. What I don't understand is why they insist that capitalism as such is problem. The real issue is inadequate governance and incompetent regulation.
Markets on their own do not create broad-base welfare and opportunities for all. To achieve that, targeted social welfare policies are needed. If businesses are to treat workers well, they must be formalised and submitted to rules.
It is no coincidence that the handful of nations that regularly tops the Human Development Index runs their economies by carefully regulating markets. They intentionally gear market forces to generating prosperity and sharing it widely. They do so by raising taxes, imposing laws, entitling people to services and spending on physical and social infrastructure.
The real challenge is neither to overcome capitalism nor to set market forces free. It is to gear private-sector activity to the kind of development that allows entire societies to prosper.
Hans Dembowski is editor in chief of D+C Development and Cooperation / E+Z Entwicklung und Zusammenarbeit.