If the U.S. Retreats from Capitalist Policies, the Poor Will Pay

October 18, 2019

For decades, U.S. policies such as free trade, limited taxation, and deregulated markets have been a model for developing countries. The adoption of those policies has helped more than one billion people escape extreme poverty since 1990. But with the U.S. threatening to move away from free markets, there could be harmful consequences for poor people throughout the world.

Today’s Democratic presidential candidates are mostly united in wanting a bigger role for government and a smaller role for markets across the entire economy. And President Trump’s outbursts suggest that whatever commitment he has to capitalism is equal to if not exceeded by his devotion to state-directed protectionism.

If politicians (and the voters who pressure them) had a longer-term outlook, they wouldn’t be so determined to corral capitalist forces. Instead, they’d see how the adoption of market-based policies over the past four decades has helped enable the biggest (and fastest) rise in living standards in human history.

Consider China. From 1820 to 1952, the country’s per-capita income fell from 90 percent of the world average to just 25 percent, according to economic historian Angus Maddison. A famine that stretched from 1958-62 – induced by Mao Tse Tung’s murderous policies – caused approximately 30 million deaths.

But now, China is the world’s second largest economy with a robust middle class. Its progress was not an accident: The country’s rulers consciously decided to replace command-and-control economic policies with market-based policies underpinned by capitalist principles. That’s a stark contrast to the retrograde policies of today’s central government, which include holding more than one million Uighurs in detainment camps and suppressing democracy in Hong Kong.

But for much of the past four decades, China showed the world the power of free market principles. Integrating with the global economy – a centerpiece of economic progress for countries throughout the world – was fundamental to China’s economic expansion. This meant changes like welcoming foreign investment and promoting exports. Another important change was freeing agriculture, which employed close to 80 pthe population, from state control.

The changes, which began 1979, had an electric effect. As Maddison pointed out, “In response to the greater role for market forces, competition emerged, resource allocation was improved and consumer satisfaction increased.” The change has enabled 700 million people – more than double the entire population of the United States – to escape poverty over the past 40 years.

India has been another success story. Starting in 1991, it began to scrap state-directed policies that had depressed the country’s growth for decades. The new policies deregulated trade (opening the country to foreign investment in particular), labor markets, and finance. Corporate taxes were slashed, and the so-called “wealth tax” on company shares was eliminated, which helped the country’s equity market grow. Some public sector monopolies were abolished, and the average tariff rate came down from 113 percent to 35 percent ten years later.

Gurcharan Das, a former CEO of Procter & Gamble India, has written of the reforms, “We felt as though our second independence had arrived: we were going to be free from a rapacious and domineering state.”

From 1990 until 2013, approximately 170 million people escaped poverty, according to the McKinsey Global Institute. Opening the country’s economy to global competition had a significant impact, according to economists Jagdish Bhagwati and Arvind Panagariya. They’ve written that 38 percent of all the poverty reduction from 1987-2004 was a product of the change in exposure to foreign trade, which stimulated competition and attracted investment capital.

One of the country’s former finance ministers, Vijay Kelkar, has echoed the sentiment: “We got more done for the poor by pursuing the competition agenda for a few years, than we got done by pursuing a poverty agenda for decades.”

Several other countries have significantly raised living standards for the poor after embracing capitalist-oriented public policy. But more than 700 million people throughout the world remain in extreme poverty – many of them living in countries where government officials mistakenly believe that curbing market forces will create a stronger economy.

The socialist and protectionist policies being peddled by Democratic candidates and President Trump can be seductive, but such policies stifle economic growth, which is fundamental to reducing poverty. Capitalism, by contrast, has been critical to poverty reduction, especially in recent decades, while also unleashing far-reaching prosperity. A U.S. retreat from capitalist policies would send a dangerous signal – and contribute to poverty’s permanence in developing countries throughout the world.

Mr. Harvey is the founder of DKT International. Mr. Rees is a writer on international affairs.