The Global Poor Aren’t Dominated by Markets — They’re Excluded From Them
Religious and political leaders often talk about how poor people are dominated by markets, and how we need to protect the poor in the developing world from the crushing effects of globalization. The reality is that the poor aren’t dominated by markets. They’re excluded from them.
When Pope Francis said we must say “no to an economy of exclusion and inequality,” he underscored the fundamental problem that the poor face today: They’re disconnected and excluded from the institutions of justice that would enable them to create prosperity in their own communities.
Our immediate reaction to statements like this can be to gather and send money or goods overseas, or to focus on taxation/redistribution policies aimed at eradicating inequality. But these reactions miss the deeper sources of injustice — things like a lack of access to justice in the courts, an absence of clear title to land, or the inability to register a business.
Where the poor have gained these things in cultures around the world, they have lifted themselves out of poverty by the hundreds of millions. Where they have been denied these things, they have remained mired in extreme poverty, generation after generation.
Reform is possible. Unleashing the creative capacity of the poor is possible. But getting there requires overcoming at least four key challenges.
1. The Current System Benefits the Wealthy and Well-Connected.
Many of the powerful and wealthy don’t have an economic incentive to build institutions of justice like clear title to land or broad access to the formal economy. They are doing well under the status quo and many of them are actually benefiting from the current situation through connections, access to special privileges, bribes and sweetheart deals on things like mineral rights.
The point here isn’t to critique everyone who is privileged and well-connected in developing countries. Rather it’s to point out that pure economic incentive is not enough to build inclusive institutions. There must be a moral and spiritual motivation and a change of heart, as well as a hunger for justice that only a spiritual conversion can bring about.
2. Many are Fixated on the Bugbear of “Unfettered Capitalism.”
A second challenge to justice and inclusion for the poor is the widespread misconception that “unfettered capitalism” is the source of our economic troubles. This is a common refrain from politicians, celebrities and religious leaders, and even, unfortunately, from business professors.
I once participated in a panel discussion about capitalism at the Academy of Management. Accompanying me on the panel was a European professor from a prestigious Ivy League business school who argued that the biggest problem we face is unfettered capitalism — not crony capitalism, but unfettered capitalism. He said this several times, so I finally pressed him to give an actual example of where such unfettered capitalism exists. Of course he could not.
In Europe, on average 40% of GDP is made up of government spending. We often hear about the brutal Anglo-American model, but the U.S. is not much different from Europe: Government spending is close to 40% of GDP, with a government debt to GDP ratio of over 100%. In the last several years, thousands of new regulations have been added. Corporate tax rates are at 39%, the highest among OECD countries, and with personal rates, five of the seven brackets are at 25% or more, with a top bracket of 39% to help pay for all this spending. Even the original Keynesian, John Maynard Keynes — a proponent of government interventions in the market — once commented in a letter (to Colin Clark, May 1, 1944) that he thought the highest tolerable limit of taxation was around 25%.
The problem is that, while the unfettered capitalism we hear so much about does not really exist — and is a distraction from the real issue which is, more often than not, crony capitalism and oligarchy — an economy controlled from the top down benefits politicians and corporate insiders, and excludes the poor.
3. Populist Policies and Populist Rhetoric Distract.
A third and related challenge is that populist programs and populist rhetoric distract from building an economy that allows the poor to enter the formal economy and create wealth through business enterprise. A majority of countries throughout world create burdensome and exclusionary rules that harm the poor, but they enact one or two high profile populist programs that make it look like they care for the poor. Then they try to shift the blame to others to mask the obstacles and exclusionary policies they create.
India, for example, provides up to 100 days of paid labor for the poorest, which makes the state look benevolent. But if instead the government built institutions of justice, if they didn’t suffocate the poor under corruption and cronyism, then the government wouldn’t need to offer the subsidy. The poor would be able to find work that paid better, and they would have the dignity of knowing they were taking care of their families, not dependent on the benevolence of the state.
It has been a classic Latin American strategy to blame some other outside force for its own problems. Whether it is neoliberalism or hidden interests, or U.S. foreign policy, the cause of poverty is always something from outside. While the U.S. and Europe are not blameless, the main reason for poverty in Latin America is bad governmental policies of the right and the left that enrich a few at the expense of the majority. It’s important to unmask this deception so people understand the root of the problem.
4. The Idea That Charity, and Not Business, is the Solution to Poverty Misleads.
Charity and concern for the poor is essential. There will always be poverty and human need, and, as Benedict XVI wrote in Deus Caritas Est, this requires a response of love. The state cannot solve all our problems. Neither can economic development alone. There will always be the need for human love and care for the widow and the orphan. But at the same time, for the majority of the world’s poor, the long-term problem is they are excluded from the institutions of justice that would enable them to create prosperity in their own families and communities.
The challenge of global poverty is complex. Thoughtful economic and legal reforms are necessary, but so too are spiritual transformation, moral clarity and a hunger for justice rooted in prudence, charity and truth. One of the first things we need to do is identify the problems correctly.