A couple of interesting news items crossed my path this week that argue for the economic benefit of free markets…
First, in an article in BusinessWeek Online Dianne Ferrell claims that freeing the Indian financial system from government control could lift GDP enough to raise household incomes by 30% by 2014 and lift millions out of poverty. She notes that the government requires banks to hold 25% of their assets in government bonds and to direct 36% of their loans to specific priority sectors that have higher default rates than other loans. As a result, India’s banks restrict their total lending to just 60% of deposits, one of the lowest ratios in the world.
Then I heard a piece on NPR in which commentator Glenn Hubbard argues that the reason Mexico’s economy isn’t growing fast enough to provide opportunities for all of the people trying to come to the US illegally is that the telecom and oil industries are dominated by government supported monopolies. Tax and labor regulations limit opportunities for entrepreneurs and property rights are not rigorously enforced. He claims that breaking the monopolies and fostering entrepreneurship will raise living standards and generate funds for greater social spending.
Both of these analyses sound plausible and I guess resonate with my biases, although I note that neither commentator provides solid evidence for the magnitude of the effects they argue for.
Following those two, another article that I thought was interesting turned up in the NZ Herald on Friday. This one is about the problems the World Trade Organisation is having getting agreement in the Doha round of talks on trade liberalisation – primarily because of the unwillingness of the US and the EU to give up tariff barriers and subsidies in agricultural and industrial products. The article comments – “Experts are reported to believe that without a breakthrough this month the Doha round may have to be shelved for several years, potentially killing an initiative aimed at boosting world economic growth and lifting millions from poverty.” (Emphasis added)
This really winds me up. It’s one thing to say that developing countries should liberalise their economies in order to promote economic growth (and I think they should). But the situation here is that interventionist policies in the wealthiest countries, policies designed to protect their most inefficient industries, are preventing families in the developing world from climbing out of poverty. Disgusting.