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Editorial

Converging views

by Hans Dembowski
Private sector firms provide mobile telephony services in Benin

Private sector firms provide mobile telephony services in Benin

Western governments always wanted aid to make markets flourish, but the governments of developing countries used to be sceptical. Both views were empirically founded. Donor governments understood that post-war reconstruction in Japan and western Europe only succeeded so fast because it was driven by market forces. The leaders of newly independent colonies, however, knew that the affluent few can buy everything and anyone in very poor societies – from high-ranking judges to under-age girls.

In the 1980s and early 1990s, the west believed it could introduce market dynamism all over the world. The structural adjustment programmes drafted by the World Bank and the International Monetary Fund were supposed to downsize governments in developing countries in order to create space in which private enterprises would thrive.

All too often, that did not happen, and structural adjustments merely resulted in incapacitated states with impoverished markets. An important reason was that the societies of many developing countries did not have the formal and informal institutions that markets depend on. Instead of fair competition, there was nepotism and corruption. Instead of contracts being enforced according to the rule of law, might made right. Instead of comparatively cheap labour attracting foreign investors, bad infrastructure frightened them off. Structural adjustment did not kick-start economies, allowing governments to collect more taxes and service their debts. Instead, weak economies became weaker and poor nations sank deeper into debt.

A re-think was necessary. By the late 1990s, the World Bank was promoting its idea of good governance, which is about managing a country’s resources in a way that fosters development. The goal was still market-driven prosperity, but the focus was on creating the necessary institutions, including basic social services in the health and education sectors. Donors began to link debt relief for over-indebted countries to policies that promoted sectors like these.

In the developing world, however, attitudes changed too. China completely redrafted its economic policy after successfully experimenting with markets in the 1980s. Other emerging markets had to undergo structural adjustment after financial crises, but bounced back fast and kept growing ever since – just consider the cases of India, Turkey or Brazil. In these countries, institutions were stronger than where structural adjustment had failed before. These economies, moreover, were much bigger, and the reform agendas not quite as austere. Even Indonesia, where the IMF later admitted that its conditionality had been too tough, was back on its feet after a few years.

Of course, other issues – in particular the stunning success of mobile tele­phony – also made experts in developing countries appreciate the positive role of market forces. Today, even think tanks close to the Indian government happily acknowledge the developmental relevance of business (see comment on page 439).

Business-oriented approaches to development certainly make sense. But
social sectors must not be neglected either, as the governments of China, India and Brazil will tell you. All three worry about gaps widening between the rich and poor. And yes, good governance and prudent regulation matter too: the financial crisis that keeps plaguing the world economy was brought about by rich nations’ failures on that front.