Free market capitalism can provoke a wide range of reactions. Those who vigorously advocate on their behalf credit unbridled markets with economic dynamism, job creation and higher standards of living. Critics, on the other hand, will point to employment insecurity, layoffs and low wages as the fruits of market-driven economies. Both sides give ample evidence to support their claims.
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This begs the question: is free market capitalism on the whole good or bad for a nation-state to adopt? Do the benefits outweigh the costs? One way to answer is to consider emerging economies and their experiences with free market capitalism.
Where Do We Find Emerging Economies?
Different sources interpret economic status in different ways. For the sake of discussion, the most commonly referenced emerging economies among major business publications include Brazil, Russia, Indonesia, and China. The Philippines is now considered a major contender, as well. A market is considered “emerging” – as opposed to “developed” – when it shows evidence of liquidity, i.e. debt and equity can be expediently bought and sold without being devalued. Other telltale signposts for emerging economies are a standard currency, stock market, and banking system. While not as sophisticated as in advanced economies, these elements signal a country’s emergence from frontier market status.
Post-communist economies like Russia (officially) and China (unofficially) have instituted internationally influential stock exchanges in the last generation. The Moscow Exchange (MOEX) is the largest in Russia, trading in equities, bonds, derivatives and commodities. Similarly, the Shanghai Stock Exchange – established in 1990 as part of a national agenda of economic liberalization – has seen vibrant trading over its 27 years, with 1,124 listed companies. Since the fall of Soviet rule in Russia, and the inauguration of financial reforms in China, both states have allowed a certain degree of private banking. Each operates from a unified currency, the ruble and renminbi, respectively.
Other economies emerge due to myriad reasons. Once branded “the sick man of Asia,” the Philippines is now often referred to as a “tiger economy”. Of the defining components for emerging economies, the Philippines boasts a shareholder-based, revenue-earning stock exchange; a 24-year old banking authority that has the power to keep prices stable. The Filipino peso has, at various times, performed well against foreign currencies. Indonesia, likewise, has a competitive currency (now and then), an expanding banking system and a stock exchange with a modernized and regulated trading system. Emerging economies are poised to become excellent targets for investors.
Free Market Capitalism Hits and Misses
Brazil Loosens Controls
Until about 1990, Brazil’s government rigidly managed its economy through state-owned businesses, subsidies for private firms and a vigorous policy of protectionism. However, inflation, burdensome debt, corruption and waste took their toll, driving investors away. Shedding many of the old rules, Brazil adopted free market capitalism to better utilize its large labor force and abundant natural resources to better compete in world trade. As a result, poverty is ebbing and living standards are improved.
Capitalism Wins in Vietnam
Having imposed rigid socialist ideals on its economy upon taking over the south in 1975, the government of Vietnam was confiscating crops from farmers in exchange for ration cards. By the 1980s, Vietnam was reeling from lack of investment and a dearth of trading partners. Responding to this reality, the government decided to allow the farmers to sell their surpluses for profit and sold some state-owned enterprises. Today, the country is a major exporter.
Prosperity in the Philippines
What kept this nation down financially was government corruption and inefficiency. By the 1980s and the fall of strongman Ferdinand Marcos, the country needed a bailout by the International Monetary Fund (IMF). The subsequent combination of serious political reform with free market capitalism led to the rise of profitable industries like call-center outsourcing, a 25-billion dollar concern. In 2012, the Philippines pledged one billion dollars to the IMF on behalf of European economies.
Ethiopia’s Economic Expansion
Surprising to many is the strong economic performance by Ethiopia over the last decade. Free market capitalism is slowly but surely creating a stronger agricultural sector – 42 percent of GDP – while opening new economic doors in energy and textile production, along with hospitality and tourism. Foreign investment is climbing, leading to steady annual growth of nine to 10 percent. While the government still invests in its industries, private contributions are gaining ground.
Russian Roulette with Rosneft
Free market capitalism, of course, does not always yield positive results. In 2014, Russian energy giant Rosneft was hurting due to low oil prices and international sanctions. To stop the bleeding, the company issued 625-billion rubles worth of bonds to a private bank. It, in turn, obtained a loan from the Russian central bank. Giving Rosneft the proceeds, the private bank was able to save the company and profit handsomely from the bonds. Yet the backdoor way in which Rosneft obtained funds caused investors to lose confidence in the ruble. Its value plummeted substantially.
China: Rich But Still Communist
The spectacular expansion of the Chinese economy over the last 25 years is indisputable. Still, the hope of the west was that free market capitalism would tame China’s international ambitions. Instead, the huge revenues received by Beijing have fueled a very large arms build-up and a very aggressive posture in the South China Sea.
With many diverse natural resources and a thriving population, Indonesia has made some efforts in recent years to take the shackles off of its economy. One area, specifically, is the elimination of fuel subsidies. This works fine when world crude prices are on the low side. However, when prices soar – and Indonesians bear the full brunt of them – free market capitalism may take the blame for an increased cost of living.
Most emerging economies have an abundance of both natural and human resources. Free market capitalism allows businesses to exploit (in a good way) them to bring prosperity and economic promise to these nation-states. This philosophy, however, does not always account for human vices like corruption and incompetence. The economic and social fallout should be weighed against the enormous financial potential.