Global Issues. Kristen A. Hite
that lack the resources to comply with requirements of nontariff measures imposed by rich nations.34 For example, the huge subsidies that wealthy nations give to their farmers make it very difficult for farmers in the rest of the world to compete with them. Another example would be domestic health or safety regulations, which, though not specifically targeting imports, could impose significant costs on foreign manufacturers seeking to conform to the importer’s market. Industries in developing markets may have more difficulty absorbing these additional costs.35 See below for further discussion on trade.
Systematic Approaches
Now that we have made a brief examination of poverty and international efforts to help alleviate it, let’s focus on another question: why are some countries rich and some poor? There is no agreement on the answer to that question, but various views have been presented over the years. Although vast differences among the nations of the world make generalizations hazardous, it can be useful to consider some of the most widely accepted approaches or views of economic development: the first is a relatively purely market‐driven approach, in which the primary function of the state (if any) is to enable and govern the physical, infrastructural, social, and political conditions which allow free market transactions to occur. These conditions may range from transportation networks (though there are some who argue that even these should be privatized) to legal systems enabling enforcement by the state of private property contract rights that facilitate commercial transactions between relative strangers. The second approach envisions a more active role for the state, which has historically ranged from direct central control of production and labor by the state as described by Karl Marx and his intellectual descendants, to more indirect means of guiding or influencing market forces through direct government purchase and expenditure, regulation, subsidies, and/or incentives, as described in part by John Maynard Keynes and implemented in the US in the form of an economic stimulus package in response to the “Great Recession” in the first decade of the twenty‐first century.36 In both cases, it is important to consider inclusive governance in order to help address inequality and enable civil society to meaningfully participate in economic activities and benefit from development.37 The third approach we describe is a blended approach.
A Market Approach
A decentralized, market‐driven approach holds that nations can acquire wealth by following four basic rules: (1) the means of production – those things required to produce goods and services such as labor, natural resources, technology, and capital (buildings, machinery, and money that can be used to purchase these) – must be owned and controlled by private individuals or firms; (2) markets must exist in which the means of production and the goods and services produced are freely bought and sold; (3) trade at the local, national, and international levels must be unrestricted; and (4) a state‐enforced system of law must exist to guarantee business contracts so as to ensure safe commercial relations between unrelated individuals.
Adam Smith, the eighteenth‐century Scottish political economist sometimes credited as founder of the market approach, believed that the operations of labor are the key to increasing production. He argued that it is much more efficient for workers to specialize in their work, focusing on one product rather than making many different products. If workers do this, and if they are brought together in one location so their labor can be supervised, increased production will result. Smith also presented the idea that, if the owners of the means of production are allowed to freely sell their services or goods at the most advantageous price they can obtain, the largest amount of products and services will be produced and everyone will benefit. It is the prices in the markets that suggest to the businessman or businesswoman new profitable investment opportunities and more efficient production processes. (For example, when oil prices rose dramatically in the 1970s, new investments occurred in alternative energy sources and some industries came up with ways to reduce the amount of oil they needed to buy. Some business people saw the alternative energy investments as a way for them to make money in the energy field, and some industries cut their costs, thus increasing their profits, by becoming more efficient in their use of energy.)
Plate 2.3 The market approach is followed on the streets in many countries
Source: Mark Olenski.
Smith did not focus on the role of the entrepreneur, but later market theorists did, making the entrepreneur – the one who brought the means of production together in a way to produce goods and services – a key component in this approach. Finally, Smith and other market theorists emphasized the importance of open trade. David Ricardo earned a place in economic history for positing that if a nation concentrates on producing those products in which it has a comparative advantage over other nations – advantages that climate, natural resources, cheap labor, or technology give it – and if it trades with other nations that are also concentrating on those products that they have the greatest advantage in producing, then all will benefit.
A market approach holds that government has a crucial but limited role in maintaining an environment in which economic transactions can flourish. Under this approach, government would confine its activities to providing for domestic tranquility that would ensure that private property is protected and contracts are secure; providing certain services, such as defense; enforcing private contracts; and helping to maintain a stable supply of money and credit. The reason some nations are poor, according to the market approach, is that they have not been successful in competing with other countries within the bounds of the basic rules listed above.
Advocates of the market approach point to the wealth of the United States and Western Europe as evidence of the correctness of their view. Even Karl Marx said that the hundred years of rule by capitalists were the most productive in the history of the world. And although an uneven distribution of income occurred in Western Europe during its early period of industrialization, the distribution of income later became much less uneven. This indicated that the new wealth was being shared by more and more people.
Nations such as Japan and West Germany, which came back from the devastation of World War II to create extremely strong economies by following the basic principles of the market approach, are also cited as evidence of the validity of the approach. Examples can also be found among non‐western countries that have achieved such impressive economic growth by following the principles of this approach that they have moved into a separate category of the economic development: the newly industrializing countries. Many of these economies, such as China, South Korea, Taiwan, and Singapore, achieved their high economic growth at first mainly by exporting light manufactured products to the developed nations.
Finally, advocates of the market approach point to the decisions of Eastern Europe and other countries, during the 1980s, to adopt at least some market mechanisms in their efforts to reform their economies. Even China – the largest remaining communist government – has adopted many important aspects of the market approach, which is widely believed to contribute substantially to China’s impressive economic growth.
Critics of the market approach point to the high rates of unemployment that have existed at times in Western Europe and the United States. At the present time, high unemployment rates are still found in a number of nations that have followed the market approach, despite impressive increases in their GNP. Much of the industry that has come to the South has been capital intensive; that is, it uses large amounts of financial and physical capital but employs relatively few workers. The more recent economic shocks resulting from the global pandemic have also exposed the inequalities and fragilities of market‐based economies.
There is evidence