Many have offered that a modicum of prosperity must be existent before freedom can be enjoyed by a given society. In other words, a nation cannot afford to be free unless it is sufficiently prosperous. Using comparisons of specific historical examples and contemporary arguments, the idea that before peace and prosperity are possible, an environment of free thinking that catalyzes the questioning of authority structures must come first. To try to pour money into a society that is ruled by force and has an economy characterized by cronyism has been shown not only to be ineffective, such policies have actually exacerbated poverty, tyranny and belligerence.

A short history setting the stage will lead into the tentative steps toward LDC development. These will be then explored in several examples, with an emphasis upon what worked, what did not and why. The failures and successes will then be evaluated with an objective of providing a prescription for what will likely produce positive results vis-à-vis freedom, peace and prosperity for the North and South.

As traditional societies feel economic pressure from the outside world, a typical development pattern emerges. The first stage is simply raw material export – the people themselves often being regarded as commodities also. Afterward machinery is imported to develop these raw materials for further processing elsewhere. In some cases a further stage will be characterized by having finished products manufactured in a labor-intensive manner – such as is the case with textiles. The indigenous government would act as gatekeeper/manager of this development (Moghadam 6-7). [By way of illustration, the stages would be: raw cotton exported/cotton made into fabric/fabric sewn into clothing.]

Women were often seen as merely “sources of cheap labor” in this development process in much of the Third World. In places wherein preserving social tradition outweighed desire for development [such as in the traditional Islamic world], women were often left out. Given that half of the potential workforce was relatively unavailable, this also put such societies at a comparative disadvantage to other cultures that had no such qualms. Some countries dealt with this problem by importing men from elsewhere rather than having their women work (Moghadam 7-8).

The governments in these traditional societies found themselves torn. On the one hand, there was internal pressure to preserve existing strictures that would threaten to provide more universal economic empowerment that comes with drawing a wage. Pulling in the opposite direction was the promise of economic development and political prestige that came from more people becoming active participants in the increasingly interdependent world economy (Moghadam 8-9).

Late in the nineteenth century and into the early twentieth, Western countries that had varying degrees of ties to LDCs began in earnest to develop organizations that were specifically designed to have a positive effect upon the native culture. Many were exported versions of their own civic organizations, such as the Red Cross. While the United States expanded its presence in the newly won Philippines, such entities served to integrate as many people as possible into the development process, but there was also a motive of containing any impulse toward violent resistance to occupation (Hilhorst 13).

Americans encouraged the formation of political and social movements geared toward universal participation and benefit. From it developed a growing movement to increase the voting franchise for previously neglected/marginalized groups. However, most of these also operated within the framework of enhancing the economic and political position of favored figures within the native elites. This tended to lead to authoritarian regimes being installed and held into place. This was all the more likely given the concern of forestalling any perceived threat of Marxist expansion as the Cold War began to intensify in the mid twentieth century (Hilhorst 13).

There was a backlash against this as opposition movements developed, some completely home-grown while others were backed by the colonials’ rivals seeking to weaken the client regime or perhaps replace it with its own satellite. The indigenous populations thus often found themselves caught up in the middle of a geostrategic power struggle in which they would otherwise have had no interest.

A generation earlier, many in the West became disenchanted with classical liberal market economies and sought solutions that involved strong central governments ostensibly acting as vanguards for the disfranchised uneducated masses. Thus, we witnessed versions of Marxism and fascism being brought from theory into practice in varying degrees in Europe and North America. These ideologies had differing levels of support within the existing power structures, so conflict often ensued.

In many cases then, the internal conflicts within colonial powers would compliment the geostrategic ones that would in turn lead to Western-born opposition groups being imported into subject countries. Thus in the case of the Philippines, nationalist and student activist groups were complimented by Liberation Theology Catholics and Communist parties that joined in the fray against the U.S. supported regime. These were banned under Marcos’ declaration of emergency powers, so many went underground or had a public front that had a covert side of undermining the regime. These and others eventually were successful in peacefully removing the Marcos without it becoming a client of an expansionist rival such as the PRC (Hilhorst 13).

In post-colonial societies, the “exploitative nature” of their former status often provided the indigenous elites “with a convenient scapegoat for their failure in managing their economies efficiently after independence.” Thus, in the example of the nascent sovereignties emerging in Africa, explains economist Ahmad Abubakar, internal and external commentators lamented that they only enjoyed a “flag independence” when in fact their economic fates were determined elsewhere. The leadership was Western educated, but failed to adapt their thinking to their own environments, instead implementing development strategies that were “urban-based, oriented to elitist consumption and outward-looking” (Abubakar 1-2).

The leadership became increasingly estranged from their constituencies and neglected to appreciate the essential importance of widespread education and agricultural self-sufficiency, choosing instead to spend scarce resources upon “industry and social services.” They successfully brought down infant mortality rates while birth rates were not commensurately reduced. As the 1960s progressed into the ‘70s, competition over raw material exports between LDCs intensified, reducing profitability and creating a spiraling domestic “food crisis.” Much of the export-oriented former “colonial economic structures” persisted. Import substitution strategies failed, argues Abubakar, because it entailed undue “dependence on imported raw materials and capital goods” and the production base was overly invested in expensive consumer goods that the domestic populations could not afford – and were comparatively non-essential as efforts toward self-sufficiency (Abubakar 2-5).

Taiwan by comparison had considerable disadvantage to Africa with respect to raw materials and land mass. Yet the 132nd smallest nation on earth has enjoyed 7.9 percent economic growth from 1985 to 1995 while the world figure stood at 2.9 percent. “These statistics were not a fluke,” argues University of Alaska Political Science professor Gerald A. McBeath. Taiwan’s plan was not original, being “based upon the experiences of the English and American industrial revolutions” and influenced by the models of the post WWII recoveries of Germany and Japan. During the early 1950s, the ruling KMT entertained dreams of “recovering the mainland” and was thus resolved to foster the economic growth necessary to build such military power. Agriculture was modernized; “nascent industries” were encouraged with a special emphasis upon export. “Land and labor” oriented enterprise was gradually phased out in favor of “technology and capital” (McBeath 246-7).

Import substitution strategies were implemented during the late 1950s, but the benefits were “short-lived,” thus a “shift toward export-oriented industrialization” began to reap better results. This in turn led Taiwan to lose its “comparative advantage in labor-intensive manufactures,” so adjustments were made to toward technological development and an aggressive move toward participating in international capital markets – and to encourage foreign investment domestically. Politically, Taiwan remained essentially a one-party state until the late 1980s, and there was some distrust of private enterprise amongst some of the ruling elites. However, the KMT became increasingly divided – thus in effect less vigilant – in political cronyism being extended to the economy. High literacy rates, a strong work ethic and relatively low tax rates encouraged the entrepreneurship that is vital to a solid economy. Thus economic liberalization fostered economic growth, which in turn led to eventual political liberalization – which only helped the economy further (McBeath 247-51).

In Brazil, explains Universidade Federal Fluminense political science professor Eduardo R. Gomes, leaders emulated the typical 1960s Latin American model of protectionist domestic-oriented import substitution that featured an “overvalued exchange rate.” The state was the primary actor, providing “basic services” as well as fostering heavily regulated entrepreneurship. Given this environment, businesses devoted considerable energy toward “influencing the process of policy-making or for getting specific privileges from the state through various channels of interaction with public spheres, such as bureaucratic rings, policy networks, by and large, with short-term demands, in a narrow and dispersed way” (Gomes).

During the 1950s, independent companies devoted effort to maintain a “corporatist” monopoly structure “rooted in the industrial sectors of durable and intermediate goods that were emerging in the country at that point.” Given the heavy hand of government it was still “partially subordinated to the state” and expended effort to secure success by currying favor with officials. The export market was heavily reliant upon coffee exports – the markets of which were highly competitive (Gomes).

The stagnation that resulted led the government to borrow heavily – which in turn led to balance of trade deficits, currency devaluations and hyperinflation. This had a more than tangible effect upon the population, leading to widespread unrest that was forcibly quelled by a military takeover. Once stability was restored, the national government worked toward promoting export starting in the mid-1960s using import-substitution and promoting the expansion of the manufacturing sector. As the following decades ensued, shifting government economic policy placed “long protected entrepreneurs” in the position of dealing with heavily subsidized foreign competition or concentrating on a domestic market that was still closed to the outside (Gomes).

Oil shocks, excess textile productive capacity and international protectionism served to deepen Brazil’s economic crisis, to which the business community responded by asking for more subsidies. The military regime ceded power in the mid 1980s and popular opinion favored a wage and price freeze that only served to buy time. That is because, asserts Gomes, this and other interventionist plans “all lacked complementary policies for fiscal soundness [and] enhanced domestic competition” aimed at producing long-term growth. Further, it put various sectors of the domestic economy destructively at odds with each other rather than seeking mutual benefit (Gomes).

Reform and development has been notoriously problematic in the former Soviet Republics. The Harvard Institute for International Development’s Alexander Pivovarsky argues that in the example of the Ukraine, “slow progress in economic reforms lie in the political economy, not in the innate inability of Ukrainian society to establish an effectively functioning market economy.” Privatization has been nominal; one must have political connections in order to attain influence in business. There are two economies: a real one and a ‘virtual’ one that functions unaccountably, often by means of barter. Conceding to this reality, the government accepted “more than 20 percent of tax obligation was paid with goods and services” in 1998 (Pivovarsky).

This unofficial barter economy represents nearly half of all transactions. Because of this, explains Dr. Pivovarsky, “book profits have little to do with firms’ revenues since most debts remain unpaid for many months.” Barter trade at this scale detracts from transparency, thus feeding a pervasive atmosphere of corruption and a constituency among the political/economic elites to preserve a status quo that functions to the detriment of most everyone else. Ukrainian banks’ total assets are only 18 percent of GDP – one of the lowest in the world – thus they do not serve their normal role as “financial intermediaries between the households and the firms.” Instead, the government fulfills that role with subsidies, tax breaks, “access to energy inputs,” etc. Thus, connections and payoffs to officials are considered critical to real economic opportunity in the Ukraine (Pivovarsky).

The “officially loss-making” energy sector is critical to the national financial system and is the “largest net creditor” because of the virtual economy and those left out must use scarce hard currency. Because of this – at 200,000 – Ukrainian “registered small business” are only one-tenth of those in neighboring Poland. Dr. Pivovarsky also offers that a “poor bankruptcy system” is characterized by banks having “effective authority over the indebted enterprises’ bank accounts” which in turn serves as a “de facto equivalent to imposing a 100-percent tax on their cash revenues.” Further, most private companies have little confidence in the courts’ abilities to enforce contracts, thus they must turn to “informal mechanisms” that are less reliable and have “high transaction costs” (Pivovarsky).

Even in a relatively stable economy like that of Mexico, if the essential mechanisms that promote growth are not sufficiently extant, development beyond a certain point can prove to be problematic. Noting the importance of investor security for capital formation to be effective, Council on Foreign Relations’ Florencio Lopez-de-Silanes observes that shareholder rights are “very bleak” in Mexico. Shareholders can vote, but advance information about upcoming agenda are not sent to investors. Voting shares by mail is not permitted and if shareholders then give notice that they plan to vote their shares, they risk being “blocked, making it impossible for them to trade the shares in the days surrounding the meeting” (Lopez-de-Silanes).

Further, when they vote they can only “vote on the slate of directors proposed by management and are not allowed proportional representation on the board.” Creditor rights are also poor, thus disincentivizing internal lending. The Mexican legal system’s ability shares a similar weakness in financial enforcement. Poor accounting standards that Dr. Lopez-de-Silanes explains typifies most civil-law countries [e.g. Germany, France] is distinguished from common-law systems [e.g. the United States, Great Britain] (Lopez-de-Silanes).
 
Perhaps as an adaptation to the “weak legal protection,” Mexico’s dispersion of corporate ownership is very poor – in fact having the third largest level of concentration in the world. External equity access is “roughly half the world mean” and the IPO offering ratio is about thirty to fifty times less than the world mean. What this portends for Mexico’s financial future is that “exogenous component of financial market development, obtained by using legal origin as an instrument, predicts economic growth.” Financial and economic development are tied and if investors are not as free to direct their resources to the most productive sectors, the nation’s economy is adversely affected (Lopez-de-Silanes).

Perhaps what is needed in all of the above cases is a concerted regional approach. Today the world reaps a great advantage given that Cold War “superpower geopolitics” no longer drives international decision-making. This has provided a great benefit in that it is no longer necessary to prop up authoritarian regimes in order to forestall a vacuum being occupied by a threatening Soviet client. Thus, liberalization has taken hold in the developing world. The potential reward for all concerned is not only political but also economic. Instead, offers Overseas Development Council Senior Vice President Catherine Gwin, finding ways to adjust to globalization is the current challenge (Gwin).

Rewards such as capturing “the benefits of more integrated global finance and markets” beckon. However, looming as well are such risks as “increased inequality and volatility brought about by today’s technology-driven globalization process” as well as infectious disease, environmental threats and cross-border crime syndicates. Thus, argues Gwin, these international challenges require cooperation beyond the borders. Foreign aid, medical research, financial regulation etc. are best served by a “multicountry, problem-oriented approach to development cooperation. In this environment, stability and fairness are sought be LDCs more than mere aid increases (Gwin).

Rather than simply treating symptoms, aid of various kinds should be “based on assessments of performance in areas of macroeconomic policy, poverty reduction, and the exercise of good governance” rather than the Cold War conditionalities. A result-oriented approach would include improved delivery methods of aid. Integrated efforts of donor and recipient governments would combine with those of domestic and international business as well as NGOs. Indeed, argues Gwin, a “new paradigm” geared toward mutual benefit gained from cooperation “not only providing adequate resources but providing them in new ways” (Gwin).

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Abubakar, Ahmad. Africa and the Challenge of Development: Acquiescence and Dependency versus Freedom and Development. New York: Praeger Publishers, 1989.

Moghadam, Valentine M. “The Political Economy of Female Employment in the Arab Region” Gender and Development in the Arab World, Khoury, Nabil and Valentine M. Moghadam ed., Tokyo: United Nations University Press, 1995.

Hilhorst, Dorothea. The Real World of NGOs. London: Zed Books, Ltd, 2000. 

McBeath, Gerald A. Wealth and Freedom: Taiwan’s New Political Economy. Brookfield: Ashgate Publishing, 1998. 

Pivovarsky, Alexander. “The Challenges of Ukraine's Economic Reforms” Conference Highlights -- Ukraine: Challenges of the Continuing Transition National Intelligence Council and the State Department Bureau of Intelligence and Research, June 30, 1999. 

Lopez-de-Silanes, Florencio. “Reforming and Deepening Mexico's Financial Markets.” Council on Foreign Relations Working Group on Development, Trade, and International Finance September 2000. 

Gomes, Eduardo R. “Before Neoliberalism: Brazil's Export-Oriented Growth and the Failed Embedded Politics of Entrepreneurs” International Studies Association 41^st Annual Convention Los Angeles, CA. March 14-18, 2000. 

Gwin, Catharine. “The New Development Cooperation Paradigm.” Overseas Development Council Policy Brief. June, 1999.