Journal of Economic Literature 2009, 47:1, 123–135
http:www.aeaweb.org/articles.php?doi
=
10.1257/jel.47.1.123
123
1. Introduction
T
he last quarter century has witnessed
remarkable progress of mankind. The
world’s per capita inflation-adjusted income
rose from $5,400 in 1980 to $8,500 in 2005.
Schooling and life expectancy grew rapidly,
while infant mortality and poverty fell just
as fast. Compared to 1980, many more coun-
tries in the world are democratic today.
The last quarter century also saw wide
acceptance of free market policies in both
rich and poor countries: from private own-
ership, to free trade, to responsible budgets,
to lower taxes. Three important events mark
the beginning of this period. In 1979, Deng
Xiao Ping started market reforms in China,
which over the quarter century lifted hun-
dreds of millions of people out of poverty.
In the same year, Margaret Thatcher was
elected Prime Minister in Britain, and initi-
ated her radical reforms and a long period
of growth. A year later, Ronald Reagan was
elected President of the United States and
also embraced free market policies. All three
of these leaders professed inspiration from
the work of Milton Friedman. It is natural,
then, to refer to the last quarter century as
the Age of Milton Friedman.
The association between free mar-
ket policies and social progress notwith-
standing, economists remain divided in
their assessments of this Age. Two recent
books illustrate the divisions. A collection
of papers edited by Leszek Balcerowicz
and Stanley Fischer—Living Standards
and the Wealth of Nations: Successes and
Failures in Real Convergence (MIT Press,
2006)—endorses free market policies. A
volume by Joseph E. Stiglitz, José Antonio
Ocampo, Shari Spiegel, Richardo Ffrench-
Davis, and Deepak Nayyar—Stability with
Growth: Macroeconomics, Liberalization,
and Development (Oxford University Press,
2006)—rejects them. A joint review of these
two books allows for a brief look at both the
facts and the disagreements.
I begin this review by quickly summariz-
ing the salient facts about the world economy
and society over the last quarter century. I
then consider the two books in turn.
The Age of Milton Friedman
Andrei Shleifer
*
Between 1980 and 2005, as the world embraced free market policies, living stan-
dards rose sharply, while life expectancy, educational attainment, and democracy
improved and absolute poverty declined. Is this a coincidence? A collection of essays
edited by Balcerowicz and Fischer argues that indeed reliance on free market forces
is key to economic growth. A book by Stiglitz and others disagrees. I review and com-
pare the two arguments.
*
Shleifer: Harvard University.
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124
2. Basic Facts
Some of the central facts of economic and
social development during 1980–2005 can
be easily summarized in pictures. Figure 1
shows the evolution of world per capita GDP
at purchasing power parity between 1980
and 2005. During this period, world per cap-
ita income grew at about 2 percent per year.
The rest of the figures are organized by
region. Figure 2 presents the growth of per
capita income for the main developing regions
of the world. Figure 2 shows rapid growth in
East and South Asia (the economic history of
the last twenty-five years is indeed the story
of Asia), slow growth in Latin America, and
stagnation in Africa. Figure 2 also suggests
that the so-called transition economies of
the former Soviet Union and Eastern Europe
grew slowly during the 1980s, declined
sharply after the beginning of economic
reforms, but then expanded rapidly over the
last decade.
Figure 3 shows a remarkable decline in
infant mortality in all regions, with the world-
wide population-weighted average dropping
from 64.5 to 37.5 per thousand births.
Figure 4 presents data on life expectancy,
revealing strong increases in all regions but
transition economies and Africa.
Figure 5 shows the gains in education
around the world. Worldwide population-
weighted years of schooling grew from 4.4 in
1980 to almost 6 in 1999.
Figure 6 presents the now-familiar picture
of growth in democracy. With the conspicuous
World GDP per capita PPP
9,000
8,000
7,000
6,000
5,000
1980
1985
1990
1995
2000
2005
Year
Figure 1. World GDP Per Capita PPP
(Constant 2000 International Dollar)
Source: World Bank 2006b.
03Shleifer.indd 124
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125
Shleifer: The Age of Milton Friedman
exceptions of China and the Middle East,
the world has made significant strides in
democratization. Latin America and Eastern
Europe are the shining examples.
The World Bank presents figures on pov-
erty based on Yuri Dikhanov (2005). Between
1980 and 2000, the share of the world’s pop-
ulation living on less than $1 a day fell from
34.8 percent to 19 percent. The World Bank
forecasts that the number of people living on
less than $1 a day will continue to fall sharply
despite population growth, and account for
10 percent of the world’s population by 2015.
Ironically, the Millennium foreign aid proj-
ect argues that massive increases in foreign
aid are needed to reach this goal—the World
Bank forecast suggests that such increases
are unnecessary to reach the 10 percent
goal. Billions of people in Asia have been
lifted out of poverty thanks to economic
growth; Sub-Saharan Africa, with little or no
economic growth, is where the really poor
are concentrated.
What about economic policies? Figure 7
shows that the world median (taken over coun-
tries) inflation rate in 1980 was 14.3 percent;
by 2005 that median declined to 4.1 percent.
Figure 8 shows top marginal income tax
rates, which fell around the world from the
population-weighted average of 65 percent
in 1980 all the way down to 36.7 percent in
2005.
Figure 9 presents official versus black
market exchange rates, a common measure
of financial liberalization. In the 1980s, most
governments restricted foreign exchange
transactions; by 2005 “black market”
exchange rates have nearly vanished.
Figure 10 shows tariff rates, which fell from
the population-weighted world average of 43
Year
8,000
6,000
4,000
2,000
0
1980
1985
1990
1995
2000
2005
GDP per capita PPP (Const. 2000 INTL)
East Asia Pacific
Eastern Europe and Central Asia
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Figure 2. GDP Per Capita PPP (Const. 2000 INTL)
(Population Weighted Means by Continent)
Source: World Bank 2006b.
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Journal of Economic Literature, Vol. XLVII (March 2009)
126
percent in 1980 to 13 percent in 2004, in par-
allel with vast expansion in world trade.
Finally, figure 11 presents much more
recent data on trends in regulation, using the
number of procedures an entrepreneur must
follow before he can legally start a business
(Simeon Djankov et al. 2002). These data
are only available since 1999. Over the last
six years, these data show downward trends,
although East Asia and Latin America remain
heavily overregulated.
The message of these figures is simple.
In the Age of Milton Friedman, the world
economy expanded greatly, the quality of life
improved sharply for billions of people, and
dire poverty was substantially scaled back.
All this while the world embraced free mar-
ket reforms. Is this a coincidence? Two recent
books disagree on the answer.
3. Balcerowicz–Fischer
Balcerowicz and Fischer edited a
collection of articles presented at a con-
ference in Poland devoted to convergence
among economies. Most of the contributions
are country studies of economic reforms
and their consequences. In addition to theo-
retical and historical papers, these include
studies of China, Chile, Spain, Portugal,
Greece, Ireland, as well as the Former
Soviet Union. The conclusion of the book is
summarized by the editors more than once:
“reliance on market forces within an open
economy in a stable macroeconomic envi-
ronment, with assured property rights, are
the keys to rapid economic growth.” Milton
Friedman would have put it better, but with
the same idea.
Mortality rate of infants (per 1,000 births)
Year
150
100
50
0
1980
1985
1990
1995
2000
2005
East Asia Pacific
Eastern Europe and Central Asia
Industrialized
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Figure 3. Mortality Rate of Infants (per 1,000 births)
(Population Weighted Means by Continents)
Source: World Bank 2006b.
03Shleifer.indd 126
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Shleifer: The Age of Milton Friedman
To convey the flavor of the book, I briefly
focus on a few studies I liked the most. Wing
Thye Woo asks whether the extraordinary
success of China is due to its embrace of free
market policies, or the deviations from those.
Since the beginning of China’s reforms, China
specialists have argued that China succeeded
in its transition because of its deviations from
free market policies. First, there was the idea
that China’s township village enterprises, with
their uncertain ownership structures, were
responsible for its success. Others claimed
that China’s dual pricing system—in contrast
to market pricing—avoided the bankruptcy of
state enterprises, and thus helped economic
growth. Still later, we heard that China’s delay
of privatization and retention of a large state
sector explains its success. Woo debunks the
argument that the key to China’s success
is anything other than its adoption of free
market policies, and in particular of export-
led growth. He presents a great deal of evi-
dence, and his story is compelling. China, like
much of the rest of Asia, succeeded because
it embraced capitalism—including a largely
open economy, financial stability, and reason-
ably secure property rights for entrepreneurs,
despite, not because of, the “Chinese charac-
teristics” of its program.
Anders Åslund draws attention to the
extraordinary acceleration of growth in the
former Soviet Union at the beginning of
the twenty-first century. The growth has
been pervasive, in both resource-rich and
resource-poor countries, and has accelerated
just as Eastern Europe began to slow down.
Åslund was among the first to point out the
explosion of growth in the region and to argue
that market reforms have worked. Åslund’s
explanation of the acceleration of growth in
Life expectancy at birth (total years)
80
70
60
50
40
1980
1985
1990
1995
2000
2005
Year
East Asia Pacific
Eastern Europe and Central Asia
Industrialized
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Figure 4. Life Expectancy at Birth (Total Years)
(Population Weighted Means by Continents)
Source: World Bank 2006b.
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Journal of Economic Literature, Vol. XLVII (March 2009)
128
the former Soviet Union, and deceleration in
Eastern Europe, is smaller government bud-
gets and lower taxes in the former. There is
much to be said for the huge success of low tax
policies in many countries in the region during
this period. But an important part of explain-
ing the evidence is also the longer recession
in the former Soviet Union: the fruits of free
market reforms ripened in the late 1990s, five
years after they did in Eastern Europe.
The collection also includes a pair of essays
—one by Thomas O’Connell and Diarmaid
Smyth and one by John Bradley—on
Ireland, the miracle of Western Europe.
As much as any other country in the world,
Ireland embraced the prescriptions of Milton
Friedman: trade openness, low taxes, low
regulations, and balanced budgets. “The
main lesson from the Irish experience is that
there are certain key prerequisites neces-
sary to sustain high growth—namely, sound
macroeconomic policies, a strong commit-
ment to free trade, a lightly regulated com-
petitive microeconomic environment, and
a well-educated and flexible labor force” (p.
285). Starting as one of Western Europe’s
laggards, Ireland became the richest country
of the region in the span of one generation.
Nearly all the essays in the volume note
roles of fiscal restraint and low inflation in
encouraging economic growth. This is true
about essays on wealthy economies joining
the European Union, such as Spain, and
those on developing countries, such as Chile.
The Chile essay, by Vittorio Corbo L. and
Leonardo Hernández T., includes a convinc-
ing discussion of the role of responsible fiscal
policy and financial regulation in allowing the
Education
10
8
6
4
2
1980
1985
1990
1995
2000
Year
East Asia Pacific
Eastern Europe and Central Asia
Industrialized
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Figure 5. Education (Years of Schooling)
(Population Weighted Means by Continent)
Source: Barro and Lee 2000.
03Shleifer.indd 128
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129
Shleifer: The Age of Milton Friedman
country to sail smoothly through the Asian
financial crisis. Corbo and Hernández briefly
mention capital controls in Chile (a subject I
later return to), but do not give them much
credit for Chile’s stability, and approvingly
report their abolition in 2001.
Interestingly, the Balcerowicz–Fischer
book is framed in terms of not just growth,
but convergence. There is no talk of per-
manent backwardness, or of fundamental
irreversible differences between, say, transi-
tion economies and the rich West European
countries. Rather, the question is what poli-
cies will accelerate convergence. Nor is this
thinking confined to transition economies.
When I visited Chile a decade ago, its
ambition was to overtake Argentina. When
I visited in 2007, the question on the minds
of many policymakers was convergence to
Australia and New Zealand. Such talk might
be ambitious, but it shows where free market
policies got the Chileans.
4. Stiglitz et al.
The world is a much gloomier place in the
volume Stability with Growth by Stiglitz,
Ocampo, Spiegel, Ffrench-Davis, and Nayyar
(hereafter Stiglitz et al.). The book is an
extended critique of free-market policies and
their advocates, and a proposal for alterna-
tive policies. This volume does not deal with
all the policies Stiglitz has embraced, such
as state ownership and extensive regulation.
It merely emphasizes the virtues of inflation
and capital controls.
Central to the organization of the book,
Stiglitz et al. classify economists concerned
Year
Democracy
10
8
6
4
2
0
1980
1985
1990
1995
2000
2005
East Asia Pacific
Eastern Europe and Central Asia
Industrialized
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Figure 6. Democracy
(Population Weighted Means by Continent. 0=low 10=high)
Source: Jaggers and Marshall 2000.
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Journal of Economic Literature, Vol. XLVII (March 2009)
130
with policy into three types. The first is “stan-
dard Keynesian” economists, who adopt the
1960s Keynesian model and focus on coun-
tercyclical fiscal policy. Since most of these
economists are long retired or dead by now,
they receive little attention.
The second type is “conservative” or “neo-
classical” economists (this is an upgrade
from being called “market fundamental-
ists” in earlier Stiglitz books). Conservative
economists, according to Stiglitz et al., rely
on a neoclassical model that assumes com-
petitive markets, rational consumers, and
profit-maximizing firms. They do not believe
in market failure and therefore in government
intervention. They seek to achieve zero infla-
tion and balanced budgets. Unfortunately
for the world, in the 1990s these economists
took over policy making at the IMF, the
World Bank, and the United States Treasury.
As a consequence, the world came close to an
economic cataclysm.
Finally, there are the “heterodox” econo-
mists, like Stiglitz et al. “The heterodox
approach attempts to bridge the gap by
building a coherent model of the economy,
based on realistic micro-foundations, which
recognize that information and markets are
imperfect” (p. 39). In this approach, neoclas-
sical factors play a bigger role than they do in
Keynesian models, yet market imperfections
are also appreciated. In other words, hetero-
dox economists are reasonable middle-road-
ers squeezed between the two extremes of
standard Keynesians and conservatives. Note
the crucial rhetorical structure of the classi-
fication: just as consumers faced with the
choice of three toasters—an expensive one,
Inflation in consumer prices (Annual %)
25
20
15
10
5
0
1980
1985
1990
1995
2000
2005
Year
East Asia Pacific
Eastern Europe and Central Asia
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Figure 7. Inflation in Consumer Prices (Annual %)
(Median by Region. Excluding Eastern Europe and Central Asia)
Source: World Bank 2006b.
03Shleifer.indd 130
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Shleifer: The Age of Milton Friedman
a cheap one, and a mid-price one—tend to
pick the one in the middle, so a reasonable
reader should avoid the extremes and opt for
the “heterodox” position on economic policy.
The image of Stiglitz as the man in the mid-
dle might surprise those who see him as the
academic spokesman of the antiglobalizers,
but here it is.
The deeper problem with the classifica-
tion is that there are not many conserva-
tives, as defined by Stiglitz et al., involved in
economic policy making. Economists who
have held high positions at the World Bank,
the IMF, and the U.S. Treasury during the
period in question can scarcely be described
as Walrasian purists, let alone as conserva-
tives. As Stiglitz et al. classify their targets,
the traditional Keynesians are dead, and the
conservatives are absent from the centers
of economic policy making—abroad as well
as in Washington, D.C. The book becomes
a lopsided dialogue between the real (and
heterodox) Socrates, and the fictitious (and
conservative) Eutyphro.
Setting aside the rhetorical methods, con-
sider the two substantive issues that Stiglitz
et al. address. The first is inflation. Stiglitz
et al. argue repeatedly that conservative
economists believe in balanced budgets
and zero inflation, but that in reality there
is not much evidence that moderate infla-
tion is detrimental to economic growth. To
bolster this claim, Stiglitz et al. present one
of the few tables in the book, aptly entitled
“Countries where inflation has not impeded
growth.” The data for that table draw on a
1998 paper by Michael Bruno and William
Easterly—Bruno presumably being one of
Top marginal income tax rate
100
80
60
40
20
1980
1985
1990
1995
2000
2005
Year
East Asia Pacific
Eastern Europe and Central Asia
Industrialized
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Figure 8. Top Marginal Income Tax Rate
(Population Weighted Means by Continents. Scale 0 to 100%)
Source: Gwartney, Lawson, and Easterly 2006.
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Journal of Economic Literature, Vol. XLVII (March 2009)
132
the “conservatives” who served as the Chief
Economist of the World Bank in the 1990s.
Bruno and Easterly find no evidence that
inflation rates below 40 percent have adverse
effects on growth. A more recent study
(Mohsin S. Khan and Abdelhak S. Senhadji
2001) from the IMF presents evidence that
the thresholds beyond which inflation has
adverse effects on growth are lower, at 11 to
12 percent, not zero.
The point is not that there are literally
no advocates of zero inflation for develop-
ing countries. I am sure there are some,
although I did not find them, for example,
in the Balcerowicz–Fischer volume. Rather,
Stiglitz et al. claim for themselves the views
that seem rather conventional in the corridors
of power. And they express little concern for
the huge costs that high inflation has brought
to countries that lost control of their fiscal
policy, including many Latin American and
transition economies.
The second policy that Stigltz et al. attack
is capital market liberalization. Instead,
they favor capital controls as a way to stem
the inflow and the outflow of speculative
finance. In this, Stiglitz et al. clearly do not
share the views of the authors of papers in
Balcerowicz–Fischer, who generally see the
integration into world capital (and not just
goods) markets as an essential part of their
nations’ growth strategies.
Although the book presents little evi-
dence, it repeatedly mentions the exam-
ple of Malaysia as a country that imposed
capital controls during the Asian crisis and
that has recovered splendidly as a conse-
quence. The question of whether capital
Official vs. black maket exchange rate
10
8
6
4
2
0
1980
1985
1990
1995
2000
2005
Year
East Asia Pacific
Eastern Europe and Central Asia
Industrialized
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Figure 9. Official vs. Black Market Exchange Rate
(Population Weighted Means by Continents. Scale 0=worst to 10=best)
Source: Gwartney, Lawson, and Easterly 2006.
03Shleifer.indd 132
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Shleifer: The Age of Milton Friedman
controls, which were imposed very late in
the crisis, have helped Malaysia, is actu-
ally quite controversial, and many recent
commentators fail to find evidence that
they had macroeconomic benefits (see, e.g.,
Simon Johnson et al. 2006; Eswar S. Prasad
and Raghuram G. Rajan 2008). Ironically,
Stiglitz et al.’s own data show South Korea
recovering much faster than Malaysia (p.
183), a finding they do not mention. In
contrast, it is uncontroversial that capi-
tal controls in Malaysia have encouraged
misallocation of capital and corruption—a
key concern of the critics, which Stiglitz
et al. briefly bring up and dismiss. Johnson
et al. (2006) present compelling evidence
that Malaysian capital controls encouraged
corruption and benefited firms close to the
Prime Minister.
One way to give the readers of this review an
overall sense of this book is with an example.
On p. 70, Stiglitz et al. chastise conservatives
for objecting to fiscal deficits by making “argu-
ments based on the hard-to-verify notion of
confidence.” “Despite how frequently con-
servatives invoke the confidence argument,
there’s remarkably little empirical research
on the matter (including little research by the
IMF which seems to rely on the confidence
argument heavily).” Then, on p. 148, Stiglitz
et al. attack George Bush’s budget deficits,
equally severely. “What will happen, not just
to the United States, but to the stability of the
global financial system if foreigners lose con-
fidence (emphasis added) in the strength of
the dollar, if they worry that it will depreci-
ate in value in coming years?” A reader might
lose confidence in the rest of the book.
Mean tariff rate
100
80
60
40
02
0
1980
1985
1990
1995
2000
2005
Year
East Asia Pacific
Eastern Europe and Central Asia
Industrialized
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Figure 10. Mean Tariff Rate
(Population Weighted Means by Continents. % Terms)
Source: Gwartney, Lawson, and Easterly 2006.
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Journal of Economic Literature, Vol. XLVII (March 2009)
134
5. Conclusion
The last quarter century of world develop-
ment has presented economists interested in
economic policy with many complex chal-
lenges. To name a few, economies moving
from socialism to capitalism and embracing
market policies at first collapsed, and began
growing only after three to six years. The
rapidly growing and heavily market oriented
Asian economies suffered major setbacks in
the late 1990s, with major recessions that
slowed them down for at least a couple of
years. The economies of South America
embraced budget discipline and privatiza-
tion in the 1980s and 1990s, yet showed truly
lackluster economic growth. Importantly,
many of these regions ended the era in a
spurt of rapid economic growth, but the
troubles along the way raised questions about
appropriate tactics of policy reform.
Grappling with these questions improved
our understanding of the workings of market
economies, and of interactions between the
state and the private sector. Transition has
taught us that economic and political disor-
ganization, combined with obsolete human
capital of both economic agents and politi-
cians, can sharply slow down the economic
turnaround. The Asian crisis has reinforced
the centrality of the financial system in the
workings of a market economy, and exposed
the vulnerability of that system to financial
bubbles and generally imprudent financial
arrangements. The Latin American expe-
rience has laid bare the fact that private
ownership and fiscal prudence yield only
limited benefits in a regime of overbearing
Year
Number of procedures
16
14
12
10
8
6
1999
2001
2003
2005
East Asia Pacific
Eastern Europe and Central Asia
Industrialized
Latin America and Caribbean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Figure 11. Number of Procedures to Start a Business
(Population Weighted Means by Continents)
Source: World Bank 2006a.
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Shleifer: The Age of Milton Friedman
taxation and regulation. All these episodes
taught important lessons for the tactics of
economic policy making.
Perhaps the crux of these lessons is to focus
on the right problem. The two areas of the
world facing most dramatic economic chal-
lenges today are Africa and Latin America.
When thinking about their growth perfor-
mance, surely the most obvious problem is
the lack of new businesses and investment,
particularly in the formal sector. It seems
highly unlikely that the central challenges
have to do with whether inflation should be
above or below 10 percent (so long as public
deficits are under control), or whether there
should be a 0 or 1 percent transaction tax
on capital flows (so long as capital markets
are broadly open). It seems obvious that the
central challenges have to do with the short-
ages of human capital, and with predatory
regulatory and tax policies conducted by
African and Latin American states. Indeed,
my feeling is that reducing the burdens of
(particularly corporate) taxation and regula-
tion, and replacing extremely inefficient reg-
ulations with more appropriate ones, are the
central challenges facing many developing
countries today. The World Bank has prop-
erly drawn attention to the necessary reforms
through its Doing Business report, and we
have seen significant steps toward progress,
especially among transition economies.
But tactics is only part of a broader strat-
egy. On strategy, economics got the right
answer: free market policies, supported but
not encumbered by the government, deliver
growth and prosperity. And while a lot has
been accomplished in the last quarter century,
a lot remains to be done. Most countries have
embraced responsible fiscal policies, but it is
far from clear that such policies can survive
the volatility in the world’s economy. World
trade has a long way to go to become truly
open. Many developing countries, especially in
South Asia, Latin America, and Sub-Saharan
Africa, urgently need government much less
hostile to business. Many countries desper-
ately need improvements in their legal sys-
tems, including bankruptcy systems, to secure
property rights. Indeed, many Sub-Saharan
African countries are rethinking their devel-
opment strategies, after several state-centered
false starts. It is far from a foregone conclu-
sion that their governments will make good
choices. We have a long haul ahead of us.
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