Sure, Fight Inequality, But Set The Markets Free

South Africa's new political constellation should move along the same liberal track as India and Argentina: shock-treatment stabilization, uncompromising elimination of pervasive big government, deregulation, and opening of the economy to achieve free markets.

I use liberal here in the European sense of the laissez-faire of unfettered markets, not the Massachusetts left sense of "I am from the government, I am here to help you." We economists call it neoliberalism. But by whatever name, by itself it is not enough. Societies cannot function by rat race alone. There is a need for policies and laws that mitigate inequality. Striking the correct balance between free markets and a role for the state to assure the prerequisites for social stability and progress is tricky: Chile is a winner, while Russia and Brazil, with their uncontrolled free-for-all, are dysfunctional.

The experience of the past decade is that where governments allow markets and people to decentralize decisions, progress comes about surprisingly fast. Moreover, democracy flourishes. Just look at the success of the new Czech Republic. But the question of the correct economic model is as acute as ever. Here are four examples:

-- In Brazil's forthcoming elections, the voters must choose between a traditional elite, which by now supports a watered-down liberal agenda, and the stark challenge of a left-wing candidate, Lus Incio Lula da Silva, whose single message is social justice. Lula is no fool. He correctly likens Brazil to South Africa, with 80% of Brazilians politically and economically left out. Putting them at the center of politics is his priority. Unfortunately, he proposes to accomplish this with outworn models of big government: a closed economy, no attention to stable finance, and the familiar emphasis on wages. The last time we heard that siren song, the singer was Alain Garca in Peru, and before that, Salvador Allende in Chile.

Even so, Lula isn't the greatest threat to the Brazilian economy. The elite is responsible for the prevailing hyperinflation. Measured by the havoc it has caused to date, the elite is even more of a threat. Brazil needs stabilization and reform, but much of the reform must be directed at social progress.

-- In Venezuela, President Rafael Caldera Rodrguez won office as a compromise candidate and has tried to govern in the same way, fudging here and there, using populist models of the 1950s. Even before he was sworn in, Caldera questioned the need to service the country's external debt at a time when large deficits had to be financed by new borrowing. Tax reform and opening up the economy were put on hold. Caldera has learned a few lessons since then, but not the central one: A political leader cannot hide from taking the central responsibility for reform and modernization. Argentine President Carlos Menem boldly turned from populism to neoliberalism. And his gamble paid off: The constitution was changed to allow him another term. Caldera should follow Menem's example.

-- Indian Finance Minister Manmohan Singh has nudged the giant subcontinent onto a path of neoliberal reform. India's tradition is a mixture of London School of Economics socialism and postcolonial economic nationalism. A ubiquitous administrative bureaucracy and an overzealous legal system stifled experimentation and innovation. Until recently, the Consul, a car model of the 1950s, was the only thing on four wheels in India. Although Singh's new economic model still is encountering resistance, India's 800 million people are breaking out of extreme poverty and stagnation as they are allowed to use their ingenuity and ambition to get ahead. India is beyond the point where the experiment can be called off.

-- In Ukraine, extreme inflation and the collapse of the state-run economy have halved output in the past five years. The Czech model of stable public finance and an open economy is not accepted. President Leonid Kravchuk, without any principles other than to cling to power, is preoccupied with surviving a July election. And then what? Without an unyielding commitment to reform, Ukraine will slip into economic and political chaos. That is a threat not only to the 52 million Ukrainians but to all of Europe. Uncompromising reform and stabilization, however difficult, are the only way out.

In 1948, when the postwar West German economy was stymied by price controls, Economics Minister Ludwig Erhard used a moment when the Allied supervisors were not watching to remove all controls. The occupying Allied leaders were shocked. "Herr Erhard, my advisers tell me you are making a terrible mistake," expostulated U.S. General Lucius Clay. "Don't listen to them," replied Erhard. "My advisers tell me the same." The bold step liberated the economy and freed West Germany to move on a path of prosperity.

The maintenance of financial stability and the mitigation of inequality are the proper roles of the state--nobody else can do those jobs. Everything else the markets can do better, including in South Africa.