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Why Doesn't Capitalism Flow to Poor Countries?

  • Economics
  • Political Science


11641-05a_DiTella-rev.qxd 285 RAFAEL DI TELLA Harvard Business School ROBERT MACCULLOCH Imperial College London Why Doesn’t Capitalism Flow to Poor Countries? ABSTRACT We show that capitalism is far from common around the world. Outside a small group of rich countries, heavy regulation of business, leftist rhetoric, and interventionist beliefs flourish. We relate these phenomena to the presence of corruption, with causality running in both directions. The paper presents evidence that, within a country, those who perceive widespread corruption also tend to demand more regulation. As regulation is held constant within a country, this finding is hard to explain if one assumes that causality runs only from regulation to corruption. We also find that over time, increases in corruption in a country precede increases in left-wing voting. To explain our findings, we present a model where corrupt capitalists are disliked, and voting for left-wing policies is a form of punishment available to voters even in weak judicial systems. Evidence on emotions supports this explanation: the fre- quency with which people report experiencing anger is positively correlated with perceived corruption, but this relationship is significantly weaker when business is heavily regulated. Economists often argue that capitalism outperforms socialism on numer-ous dimensions. These arguments are so compelling that one might be led to believe that free markets, perhaps with some redistribution, are the norm around the world. In reality, this is not the case. Outside the United States and a small set of other rich countries, public opinion tends to be unimpressed with the performance of capitalism. Resistance to free mar- kets has been observed in former communist countries, in underdeveloped countries in Africa, and in some modern democracies in Europe. In Latin America the phenomenon is especially striking. After a decade of economic reform in the 1990s, a backlash against markets has been observed in most 11641

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