Capitalism and the Poor

Interesting pre-review over at Crooked Timber (thanks to Mark Thoma at Economist’s View for the tip):

The best recent books about capitalism and the circumstances in which it helps poorer people escape their poverty are Hernando de Soto’s “Mystery of Capital” and Rajan and Zingales’ “Saving Capitalism from the Capitalists”. I met with Fred Mishkin yesterday, who has convinced me that his new book – ” The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich”
will be a worthy complement to these two.

Certainly, I suspect it will be a lot more insightful than the other globalisation book about to appear, Joseph Stiglitz’s “Making globalisation work”, the follow up to his anti-World Bank rant, “Globalisation and its Discontents”.

What I most like about de Soto’s work is its emphasis on the legal system, and the importance of it being accessible to the poor and supportive of their de facto property rights. The great strength of “Saving Capitalism from the Capitalists” – a book that deserves to be much more widely read – is its focus on the problems that flow from the existence of an entrenched elite that writes the rules of capitalism to secure its own position, rather than to allow the bulk of the population to participate fully.

Mishkin, who says he will not be allowed to give interviews about his book under impressively strict conflict of interest rules once he becomes a governor of the Federal Reserve in a few weeks, takes the story one step further, arguing that opening a country up to international capital markets in the right way is crucial to growth. As he notes, so many countries have botched the process of joining the world financial system that many are tempted to conclude it is better not to try – Argentina being a recent example. But, says Mishkin, rightly I think, doing so sentences them to remaining a poor, low growth economy.

That is, above all, because to successfully open up to international financial markets, a country has to develop the right domestic institutions, including rule of law, central banks and good governance.

Mishkin is particularly worried about Latin America, where he fears a serious reversal of the process of building sound institutions. The outcome of the current Mexican stand-off may be particularly important – not because Calderon, the declared winner of the Presidential contest, is necessarily the better candidate (his closeness to powerful business interests may limit his capacity to be a reformer) but because if the loser, Lopez Obrador, succeeds through public protests in overturning the result, that would deal a death blow to the election commission, the establishment of which was a huge step forward for institution building in Mexico, a country not hitherto known for its strong independent institutions. Here’s hoping the election commission stands firm.