the same result as in other countries and continents — poverty. The first steps away from this self-destructive economic regime began with agricultural reforms in the late sixties. They continued intermittently under Rajiv Gandhi. But it was only the jolt from the economic crisis of 1991 — and the appointment of Narasimha Rao as Prime Minister and Manmohan Singh as Finance Minister — which set India firmly on the right road. Tariffs have now been cut sharply and are due to fall further. Foreign exchange controls have been liberalized. Foreign investment is encouraged — and foreign firms are taking full advantage of the opportunities. With the removal of controls on farm prices, grain production has increased and farmers can begin to afford up-to-date equipment. A new, self-confident middle class is emerging. India’s economy is growing strongly.
A similar economic experiment has been taking place at the other edge of the Asia-Pacific region. Australia and New Zealand were infected by socialism
In Australia a Labor Government removed many financial controls and, most important, abandoned protectionism, though for political reasons the excessive controls on the labour market remained. This limited opening-up of the Australian economy to competitive pressures reversed the spiral of decline as regards economic growth; but the fact that this was not accompanied by measures to free up the labour market has kept unemployment relatively high.
New Zealand, first under the Labour Government’s Finance Minister, Roger Douglas, and subsequently under the National Party Government’s Finance Minister, Ruth Richardson, has gone much further — and the results have been that much better. Financial controls were lifted, import restrictions abolished, tariffs lowered, foreign competition in services welcomed, unemployment benefits reduced, income tax cut and the emphasis shifted to indirect taxes. Also — and crucially — unlike Australia, the labour market has been freed up. The result has been annual growth at over 4 per cent, more new jobs, falling unemployment and very low inflation, while productivity has increased and business is investing. The traditional similarities between New Zealand and Britain make the former’s success — achieved by following the same general policies as I implemented in Britain in the 1980s — of particular significance.
THE AFRICAN PROBLEM
Even more than Latin America or India, African countries have suffered from misdirected economic policies associated with the collectivist concepts of ‘development planning’.[116] But, as elsewhere in the Third World, the same implicit reason (or, depending on one’s point of view, excuse) for believing that the laws of economics can be defied with impunity is consistently advanced, namely that Africa is somehow ‘different’. A wide range of arguments was used to justify this — general underdevelopment, lack of local investment capital, over-dependence on a single commodity, the encouragement of ‘infant industries’ or, even more dangerous in its quasi-racist implications, the ‘special’ character of the African himself and his culture. It is, of course, true that cultural factors have played a role in Africa’s problems, particularly when departing colonial governments took insufficient heed of tribal and religious differences in putting together African states.[117] But, as Peter Bauer, above all, points out, experience in Africa (and elsewhere) shows two things. First, if two peoples live under the same regime of liberal capitalism, one will usually out-perform the other; but if one people lives under two regimes — capitalism and collectivism — that portion living under capitalism will out-perform its cousins. A commonsense conclusion is to choose the (capitalist) regime that makes everyone better off, even it if also allows some relative inequalities between ethnic groups with different cultural aptitudes. So anyone who understands the consequences of abandoning the tried and tested model of limited government, a rule of law and free markets can also understand why the post-colonial economic performance of African states is so abysmal.
And abysmal it certainly is. Per capita output in Africa actually declined during the 1970s and 1980s and, as a result, Africa is poorer than in 1960. Yet Africans in the 1980s received per capita a larger share of development aid from the West than anyone else. Price controls imposed on agricultural products in order to subsidize urban elites undermined agriculture, as did the confiscatory policies associated with export marketing boards and brutal forced collectivization of farms. Foreign imports and investment were discouraged. Mountains of international debt were accumulated in order to construct ill-conceived prestige projects. Finally, over-centralized power had the inevitable result of turning government in many African countries into a giant kleptocracy. As a result of this catalogue of failure, there is a tendency to give up on Africa. This must be resisted. In any case, Western countries should recall that the record of institutions like the World Bank and the contribution of those Western development economists who prompted such follies hardly inspire pride.
Moreover, closer examination of the realities of African economies challenges some preconceptions. Take South Africa, for example. In terms of mineral wealth, economic development and institutional sophistication it is outstanding. So far, the worst fears about a breakdown of order have not been realized, for which the country’s leading political figures deserve great credit. But it does South Africa no good at all to minimize the economic problems or to suggest that large inflows of foreign investment are likely to overcome them. There has been too much state direction of investment and too little competition. Industrial conglomerates have been immune to the beneficial threat of takeovers. The powerful general trade union COSATU has pushed up real wages, which in industry are about the same as in Taiwan, rather more than in Korea and about double those in Brazil. Not surprisingly in such circumstances, investment has gone into labour-saving equipment; and unemployment — with its resultant poverty — is very high. Unfortunately, socialist rhetoric and unrealistic expectations fuelled by the less responsible members of the ANC in the election campaigns will make these problems more difficult to solve. But the way forward is still to apply the same prescriptions as we would for any other over-collectivized economy — keeping down inflation and taxation, curbing public spending, cutting back regulations, promoting competition and avoiding protectionism. The only way to pay for the improved education and better living standards which the black population of South Africa need is to achieve the right conditions for wealth creation. Alas, there is no alternative — and no short cut.
Other states’ experience confirms that free-enterprise economics can be just as effective a source of progress in Africa as elsewhere. A quiet revolution has been taking place in East Africa — so quiet that its lessons may not be learned.[118] Traditionally, Kenya, the most industrialized and economically advanced East African country, was the exception to the generality of mis-government in the region. But now Uganda, Zambia and Tanzania — all previously impoverished by incompetent and corrupt regimes — are moving ahead fast. Uganda has curbed its inflation, turned a budget deficit into a surplus, all but abolished exchange controls, welcomed foreign investment, privatized the agricultural marketing boards which had wreaked such damage on cotton and coffee production, and now plans to establish a stock market. Zambia, though its privatization programme is only proceeding slowly, has made major progress in bringing down inflation and has opened a stock exchange. Tanzania has reduced tariffs, ended price controls and has a vigorous privatization programme. Of course political instability still risks jeopardizing economic progress in many of these countries. But economic progress also itself creates the conditions for stable democratic government. And one of the most effective ways of entrenching liberal political systems in that continent is to promote liberal economics.
CENTRAL AND EASTERN EUROPE
Perhaps the most decisive test of the creative potential of capitalism has been its application in the ex- communist countries of Central and Eastern Europe and the former Soviet Union. For a number of reasons, Russia and the other states of the former USSR are in a separate category from the other new democracies of Central
