In recent decades, hundreds of millions of people have emerged from poverty to form a dominant global middle class. This unprecedented advance is the result of greater economic freedom, and it spells out personal choice, voluntary exchange and the protection of property rights. It is a bottom-up development (from the bottom up) by individuals, not up and down via the state.
Over the years, economic freedom has proven to be an incredibly robust determinant of current or future country prosperity. The Fraser Institute has found that economically freer countries have higher income levels, faster economic growth, and more significant reductions in poverty rates. For example, in 2015, countries in the top quartile in the Economic Freedom Rank (Fraser Institute) had an adjusted average per capita GDP of more than $40,000, compared to about $5,000 for lower quartile.
The rise of China and India is further proof. After the partial liberalization of their markets, China after 1978 and India after 1991 began to grow exponentially, from 7 to 12%, against about 2% previously. Although none of these countries is almost entirely economically free, even their modest improvement has reduced the most spectacular absolute poverty the world has ever seen.
Free market reforms have paved the way for prosperity for millions of poor people around the world. But can governments and international organizations really plan “from above” a market economy? The short answer is: “No”. Democratic institutions can not be designed from the top or down and they can not be supported by foreign aid. Billions of dollars in development assistance have been transferred over the last 60 years, but the results have been dismal.
Economists have often found that foreign aid does not influence economic growth, while some have found that it has even a negative influence. This is because, as the former World Bank economist argued, William Easterly, it’s not about finding the right people or the right plan to solve poverty from top to bottom. Poverty is the result of a lack of rights, freedoms and quality institutions.
Market institutions are more effective when states adopt a non-interventionist approach. An excellent example of this has been an increase in “mobile” money in Kenya. A little more than ten years ago, telecom company Safaricom launched M-Pesa, a mobile money service in Kenya that allows users to send and receive digital payments. In 2015, Safaricom reported that M-Pesa payments accounted for about 44% of the country’s GDP with more than 25 million accounts.
The key to M-Pesa’s success was that Kenya’s regulatory environment was relatively accommodating. While banks and financial institutions are heavily regulated, M-Pesa, as a telecommunication service, was free of many restrictive regulations. The lack of access to finance in Kenya has been resolved through “innovation”.
One of the biggest problems on the continent is informal economies, where companies operate outside the legal framework of a country and account for around 50 to 80 percent of GDP. This underground economy is a natural response to the stifling restrictions governments have imposed on businesses and entrepreneurs, forcing people to leave the formal economy. The World Bank’s latest Doing Business report found that Africa was the hardest place in the world to start a business.
Another factor is the lack of secure property rights. The nations guaranteeing the most reliable protection of private property have a per capita income five times higher than those with only moderate protection. Without formal title deeds, individuals whip for funding, start businesses or access the justice system. African nations are among those in which property rights are the least secure in the world. If individuals and companies have no official title to their land or other assets, how can they be integrated into the formal economy?
How to help Africa?
African countries, not foreign governments, need to implement pro-free-market reforms, but that does not mean there is nothing. Western countries can do to help them.
Welcoming Free Trade and Capital Flows: One of the most critical obstacles to agricultural development in Africa is Western agricultural subsidies. For example, some 10 million people in West Africa who depend on cotton exports lose up to $250 million a year because of Western subsidies. This is just the tip of the iceberg in agricultural subsidies, and these are opportunities at hand that will benefit the most and least developed economies.
Liberalizing Immigration: Immigrants are a fantastic resource for Western economies, but they are also an excellent opportunity for the immigration countries themselves. Facilitating and flexibilities visa procedures and work permits will help improve the quality of the human capital of immigrants, who will then benefit their countries of origin upon their return.
Stop destructive interventions: Western countries should stop seeking social results through development aid. This is an example of good intentions with unintended consequences. But perhaps the biggest problem is that such interventions have encouraged a political framework hostile to the kind of economic freedom needed for development. Any program that helps to plan development from top to bottom low prevents countries from adopting financial freedom. They should be greatly redesigned.