A key reason that developing countries have often been unable to catch up to their developed counterparts is because of their refusal to accept the free market. In many parts of the world, free markets are considered unnecessary for economic growth. Governments of developing countries attempt to thrust their country into prosperity through various statist measures, but their efforts are doomed because they do not understand economics.
Economic value is generated by entrepreneurs when they conceive of a production process that satisfies consumers more efficiently than otherwise. When an entrepreneur realizes that he can sell a product for more than it costs for him to produce it, he has created value within the economy and is rewarded for it with a profit. Conversely, if an entrepreneur conceives of an inefficient production process in which he cannot sell the product for more than what it costs for him to make, he reaps a loss.
The free market allows for two consenting parties to voluntarily make agreements among themselves. This means that an agreement can only be reached if both parties believe that they benefit from the deal (absent force or fraud). If one or either party believed that the agreement did not benefit them, they would not agree to the terms of the deal. A customer would not buy a product if he believed that the firm charged too high a price, and a firm would not sell a product if a customer made too low an offer for the product.
When laws are enacted which disrupt this process, economies tend to stagnate or get worse. A favorite policy among developing nations is to enact tariffs, which are intended to make domestic industry stronger and more resilient, but actually lead to incompetence and higher prices as consumers find their choices restricted. When tariffs are implemented, developing countries do not benefit from cheaper goods that they can acquire from elsewhere. Instead, they are forced to produce it themselves, often at inferior quality and higher prices due to a lack of comparative advantage. Despite these obvious shortfalls, nearly every country has some form of tariff law.
Another example of a preferred policy in developing nations is setting a price ceiling on certain goods. This leads to shortages, as firms won’t produce a good if they don’t believe they can sell it at a profitable rate. By preventing an agreement above the maximum legal price, regulation prevents a mutually-beneficial exchange from taking place. Even if a customer was willing to pay a price above the legally-mandated maximum, they wouldn’t be able to as legislation prevents them from doing so.
This isn’t a particular issue with only these specific policies, but with all economic regulation. Economic regulation rests upon the premise that the economy will not function, or will function ineffectively, if left alone. However, in the absence of coercion, people will choose what benefits themselves and the production and consumption of goods in a society will reflect that.
Developing countries lack capital compared to developing countries. The best way to remedy this is to protect private property and protect the rights of people to transact among themselves freely. No amount of legislative tinkering is a substitute for the free market. While governments of developed countries may prefer arbitrary regulations over freedom for their people, they do so at the cost of prosperity. The key to success is not yet another piece of legislation, but to repeal it and let people build better lives for themselves.
