October 11, 2003


Free markets can hit economic growth (New Scientist, 11 October 03)

If developing countries join the global economy too soon, they risk becoming trapped in a cycle of poverty and corruption, a new analysis suggests.

A number of empirical studies have shown that poorer countries experience higher levels of corruption. Badly paid officials are easily tempted by bribes, the reasoning goes, while the well paid officials in richer nations risk losing their comfortable salaries if they are caught taking backhanders. But if corruption so bedevils developing nations, how do they escape and become rich?

Daniele Paserman, an economist at the Hebrew University of Jerusalem, Israel, and his colleagues say they have found a simple answer. If a poor country opens up its economy to the outside world too quickly, the flow of money across its borders encourages corruption, which in turn hampers growth.

But those countries with closed economies can grow until they can afford to pay their officials well. This runs counter to the conventional wisdom that free markets across borders encourage development and cut corruption. "We are highlighting one of the dangers of being more open," says Paserman. "But there are other benefits."

This would tend to provide empirical support for the intuitive notion that a period of authoritarianism--as in Spain, Chile, Taiwan--smooths the transition to democratic capitalism.

Posted by Orrin Judd at October 11, 2003 7:26 AM

It seems to me that the problem isn't too-rapid trade, it's the failure to adopt the rule of law and property rights. The new World Bank study, Doing Business in 2004 supports this, as does just about anything by Hernando DeSoto. By the way, this is an unusual piece for the Bank.

I'm speculating that a real sticking point in Cancun was that our side was asking for more transparency (government procurement, etc.) than the developing countries' governments were willing to accept.

Posted by: Dave in LA at October 11, 2003 3:58 PM

It is not so much that emerging nations must go through a period of authoritarian rule as much as political liberalization lags economic liberalization. Poor, undeveloped countries and societies are authoritarian to begin with, the notion of individual free agency in these societies is an alien concept. What we see as corruption is just an extension of the traditional power networks taking advantage of the new money flows.

Posted by: Robert D at October 11, 2003 10:18 PM

Dave from LA is right on the ball.

It seems to me we need a political-economic version of Maslow's hierarchy of needs that tells people which essential steps must be done first before others have a chance to survive. Establishment of the rule of law certainly comes before democracy.

Posted by: Chris Durnell at October 13, 2003 1:28 PM