Capitalism is in crisis outside the West because developing and former Soviet nations have been unable to “globalize” capital within their countries. Most people in these nations view capitalism as a private club, a discriminatory system that benefits only the West and the elites of poor countries. We may now all be benefiting from the communications revolution, and some may see progress in the fact that the Egyptian Sphinx now stares directly at the neon sign of a Kentucky Fried Chicken franchise. Nevertheless, only 25 of the world’s 200 countries produce enough capital to benefit fully from the division of labor in expanded global markets. The lifeblood of capitalism is not the Internet or fast-food franchises. It is capital. Only capital provides the means to support specialization and the production and exchange of assets in the expanded market. It is capital that is the source of increasing productivity and thus the wealth of nations.
Only the Western nations and small enclaves of wealthy people in developing countries have the capacity to represent assets and their potential, and therefore the ability to produce and use capital efficiently. The major obstacle confronting the developing world is that most of its citizens lack the legal representation provided by a formal property system. Eighty percent of the population in these countries cannot inject life into their assets and make them generate capital because the law keeps them out of the formal property system. So long as the assets of the majority are not properly documented and tracked, they will remain stuck in the extralegal sector and be invisible in the broader marketplace.
This obstacle can be overcome, provided that governments are willing to legally integrate the informal sector into the broader economy through a formal property rights system. This would allow the majority of developing countries’ citizens to convert their work and vast hidden resources into capital. It would also provide extralegal citizens with legal representation, enabling them to overcome the first two obstacles to capital development: the lack of a division of labor and the lack of ability to specialize in the broader economy. By transferring the ability to enforce obligations from extralegal groups to the government, it would provide incentives for people to seize economic and social opportunities outside of their immediate local community, and specialize instead within the broader marketplace.
Unfortunately, many of the current promoters of capitalism fail to realize that their macroeconomic reforms are not enough. Drafting regulatory frameworks, enhancing international trade and investment, and opening up once-protected economies are necessary reforms, but they are not sufficient. Many macroeconomic reform programs wrongly assume that populations are already integrated into the legal system and have the same ability to use their resources in the open market as do populations in the West. Economic reformers have left the issue of property for the poor in the hands of conservative legal establishments uninterested in changing the status quo. As a result, the assets of the majority have remained dead capital stuck in the extralegal sector.
Many economic reform programs may be falling into the same trap that Karl Marx foresaw, but on a global scale: the great contradiction of the capitalism system is that if too much capital is concentrated in one sector, the rest of the system is at risk of collapse. By not giving the majority access to expanded markets, these reforms are leaving a fertile field for class confrontation—a capitalist and free market economy for the privileged few who can concretize their property rights, and relative poverty for a large undercapitalized sector incapable of leveraging its own assets.
The problem remains of how we settle the disparities that come with the benefits of capitalism and globalization. Ultimately, the missing ingredient and the key to overcoming the shortcomings and inequities of capitalism is to give everybody access to the same legal instruments that allow for the creation of surplus economic value.
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