It’s almost considered heresy in many circles to say that you care about international development and that you believe in classical liberal economics at the same time. You get a lot of funny looks and statements like, “Neoliberalism was one of the worst things to happen to the developing world – look at what the Washington Consensus did to Latin America!”Property rights can help free markets work in developing countries. I recently finished reading Hernando de Soto’s Mystery of Capital, and I think his ideas make sense. De Soto proposes that part of the reason post-colonial developing countries have been unable to replicate the success of Western capitalism is because of insufficient legal infrastructure. For example, he argues that property rights are not respected in many countries and that tasks so simple as starting a small business require as much as two years of paperwork and bureaucratic delay. Ultimately, the poor find the legal system so stacked against them that they simply opt out of it entirely and operate in an extralegal realm where they enforce their own rules. This situation creates an extralegal society not unlike the American Wild West. De Soto also suggests that the representations of capital that exist in the United States (deeds to houses, titles to land, etc.) don’t exist in legally enforceable or consolidated ways in many developing countries. What good is buying a house if you don’t have a deed to show that you own it? What do you do if you cannot sue someone for simply squatting on your land? These situations create obvious problems.
To suggest that markets are failing in developing countries because the poor are simply not entrepreneurial enough or because the whole situation is the fault of Western former colonial powers is both simplistic and somewhat insulting. The poor in most developing countries are exceptionally entrepreneurial – you cannot walk through the streets of India or China without seeing vendors in stalls selling things everywhere around you. Haggle with the vendors and witness their business savvy for yourself. Yet, it is hard to be successful when a small business permit takes two years to obtain or when you can’t representationally trade your capital through the elaborate transactional mechanisms we have developed in the West.
I don’t disagree that the Washington Consensus was largely a bad idea. It doesn’t seem wise to force austerity measures and artificial liberalization upon economies that aren’t our own. The Washington Consensus, in many ways, flew in the face of certain tenets of classical liberal economics – it was an attempt at central planning. Like many other attempts at central planning, it failed because the central planners and bureaucrats at the IMF and the World Bank didn’t know very much about the local experiences of Peruvians, Venezuelans, Argentinians, and many more people. The decisions should have ultimately been made in Lima, Caracas, and Buenos Aires, among other capitals. Perhaps then markets would have grown organically and without the intense backlash to Western free market ideas that the Washington Consensus engendered.