NCPA - National Center for Policy Analysis


October 13, 2005

The failure of various forms of statism in the Third World, the former Soviet bloc, China and Western Europe has forced a revision of the development paradigm in favor of a more limited state, and has emphasized the need to analyze which policies work and which ones fail to bring poor countries out of poverty, says the Wall Street Journal.

Statism -- the practice of giving a centralized government control over economic planning and policy -- is characterized by many features, including: a large state-owned enterprise sector, competition-stifling regulations and barriers to entry, import restrictions and rigid labor markets, poor protection of private property rights and fiscal irresponsibility, says the Journal.

Statism suppress markets and criminalizes entrepreneurship; but as post-communist countries move toward a market economy (a process called convergence), they are achieving better economic and non-economic results. This suggest three broad lessons:

  • No poor country has achieved lasting convergence with developed market economies under any of the statist or failed-state systems; systems that suppress, heavily limit and distort legal market competition produce economic losers.
  • Successful cases of sustained convergence have happened under more or less free-market systems or during and after the transition to such systems because the reforms increase output and productivity in previously repressed sectors.
  • Lastly, while all cases of lasting convergence have occurred under more or less free-market systems, or during and after the transition to such systems, not all market-oriented reforms have led to sustained convergence.

Moreover, market-oriented reforms may also fail if they are incomplete or are badly structured, but those are just hurdles to overcome on the path to a full-fledged market economy, says the Journal.

Source: Leszek Balcerowicz, "The Wealth of Nations," Wall Street Journal, October 6, 2005.

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