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Published: February 23, 2010
 / Spring 2010 / Issue 58

 
 

Roots of Prosperity

The lessons of history suggest that if we want to reduce poverty in emerging markets, regulation reform and business success are prerequisites, not outcomes.

In the history of economic success, no two countries have ever followed identical paths. But there is a universal pattern nonetheless: Nations rise out of poverty when elements of a thriving business sector replace the previous economic system.

The factors necessary for this transition are known. Since 2004, the World Bank has tracked them each year in countries around the world for its Doing Business report. (The most recent version is Doing Business 2010: Reforming through Difficult Times, by the World Bank and the International Finance Corporation [Palgrave Macmillan, 2010].) The report specifies 10 forms of government regulation that affect the various phases of a company’s life cycle: starting a business, obtaining licenses (such as construction permits), employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. The fewer impediments that government places before entrepreneurs in any of these areas, and the less time it takes (for example, to stand in line) and the less money is required (for fees or bribes), the more business-friendly the country is — and the more prosperous.

To be sure, as scientific measurements of the likelihood of economic growth, these elements are not perfect. Greece ranks only 109th, but its economy is helped by its membership in the European Union, its location (which makes it a hub of Mediterranean trade), and its huge informal sector of robust businesses operating outside regulation. As a whole, however, the Doing Business list offers a reliable scale for judging which countries have paved the way for their private sector to thrive.

In 2009, Singapore ranked first out of 181 countries on the list. It was followed by New Zealand, Hong Kong (China), the U.S., and the United Kingdom. The Central African Republic ranked last, with the Democratic Republic of the Congo (Kinshasa), Guinea-Bissau, São Tomé and Principe, and the Republic of the Congo (Brazzaville) rounding out the bottom of the list.

But if the benefits of being friendly to business are so clear, why hasn’t every country jumped on the bandwagon and adopted consistent and light regulations in these areas? The answer provides a critical insight into the struggles of poor economies today. Countries often have a competing system — either a powerful and arbitrary government or an entrenched oligarchy, or both — that resists the adoption of pro-business elements. And in countries that have remained poor, that competing system is still winning.

Friends, Romans, Businessmen

The same pattern is evident as far back as the dawn of recorded history. Starting around 2500 B.C. in Mesopotamia (where Iraq is today), archaeologists have found written evidence of private business: in records of loans between individuals, government advances to citizens for tax payments, and financing to merchants for trade. As the Phoenicians, Greeks, Persians, and Romans adopted these activities, thousands of trading cities and towns sprang up. Archaeologists have uncovered in these locations an abundance of pottery, metal implements, mosaics, and sculptures, and many workshops for the numerous craft shops that sold their goods near and far. These represent the first glimmers of mass prosperity; large numbers of people had enough income and wealth for a decent life.

These commercial centers held only a small fraction of the world’s total population, however. For most of the world beyond them, life was hard and short. Literacy remained low, disease took a heavy toll, and war and pillage destroyed commerce again and again over the centuries. It was only in the first and second centuries A.D. that the Roman Empire managed to preserve peace long enough for prosperity to spread to a larger population, through the rapid growth of thousands of commercial centers with their nearby farmlands. Unfortunately, war disrupted this golden age of Roman business starting around 200 A.D. In the fifth century, the Roman Empire fell.

 
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Resources

  1. R. Glenn Hubbard and William Duggan, The Aid Trap: Hard Truths about Ending Poverty (Columbia University Press, 2009): A concise look at global poverty and the optimal solution of a business-friendly climate, including perspectives on how the current government- and NGO-based foreign aid system could profitably reform.
  2. R. Glenn Hubbard and William Duggan, “The Forgotten Lessons of the Marshall Plan,” s+b, Summer 2008: The other half of the Hubbard/Duggan prescription for combating poverty, specifically in Africa: redirect foreign aid to foster local business.
  3. Art Kleiner, “The Philosopher of Progress and Prosperity,” s+b, Summer 2004: The World Bank’s Doing Business project is based in part on the “mystery of capital” uncovered by Peruvian economist Hernando de Soto; this article introduces his theory and related practices.
  4. Sylvia Solf et al., Doing Business 2010: Reforming through Difficult Times (World Bank, International Finance Corporation, and Palgrave Macmillan, 2010): The seventh edition of the influential and well-researched comparative analysis of business-friendly conditions.
  5. Muhammad Yunus, Creating a World without Poverty: Social Business and the Future of Capitalism (PublicAffairs, 2007): Recounts the founding of Grameen Danone Foods and the concept of social business.
  6. For more thought leadership on this topic, see the s+b website at: www.strategy-business.com/global_perspective
 
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