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Ever since the great recession ended in 2009, the entire world has been following loose expansionist monetary policies. However, after a decade of such policies, most countries in the world have now started resorting to monetary tightening. The Federal Reserve has raised interest rates four consecutive times in the past four years. The Reserve Bank […]
Socialism is a failed idea. Many nations in the world have now tried socialism. It is no surprise that all of them have failed. After the World War-2, the world was divided into two lobbies. There was the capitalist lobby led by the United States. Then, there was the socialist lobby which was led by Russia.
Almost all countries that were part of the socialist lobby are now joining capitalism including Russia itself. Countries like China have abandoned socialism and moved on to the capitalist path. This is not to say that capitalism is a perfect system or has no problems whatsoever.
However, it is definitely the lesser of the two evils. This is why it is important that countries like Venezuela restart their economic journeys on capitalistic principles.
Switching over from socialism to capitalism isn’t really that simple. It involves changing the ideology and culture of the people.
In this article, we will discuss some of the economic steps that need to be taken to ensure a smooth transition to capitalism.
Socialist economies like Venezuela are trying to hold on to a failed system of price controls. The government prints more money which causes inflation. On the other hand, they pass laws that the prices should not rise above a certain level. This leads to a shortage of goods all across the nation. This is exactly what is happening in Venezuela.
The problem is that the prices set by the free market are way above the prices set by the government. Hence, the traders divert the goods to the black market where they can be purchased at a premium while causing shortages in the market.
This issue can be resolved when the government abolishes all price control. As a result of this abolition, all black markets become legal overnight. Citizens are free to trade in goods without there being any coercion from the government in the form of price controls. Initially, there will be chaos in the market. However, soon many sellers will emerge and the premium being charged will be reduced because of competition.
The next step in the process to change over to capitalism is to ensure that the government does not conduct too many businesses. The purpose of the government is to govern and not to conduct businesses. When governments run businesses, they are inefficient. This is the reason why they are not really able to compete on the global stage. This is exactly what has happened in Venezuela where the government owns all of the oil reserves.
However, care should be taken while privatizing the government’s business. When the government sells its businesses, there is a tendency to sell them off to cronies who are offering the highest kickbacks to government officials. A case in point would be the creation of Russian oligarchs who bought government assets at throwaway prices.
This is the reason why countries which turn on to socialism do not privatize their assets overnight. Instead, privatization is done in phases so that the government can learn from its own experience.
Socialist states employ a large number of the working population as bureaucrats and government servants. As a result, the best and the brightest decide to join government service since that is the more lucrative career. As a result, the private sector faces a shortage of good employees.
When a nation moves from socialism to capitalism, the number of government-run enterprises decreases. On the other hand, the numbers of enterprises which are privately run increases. Hence, the workers also need to be realigned accordingly. It is therefore important that the government layoff the workers. These workers need to be freed up so that they can work for the private sector. Almost all laid off workers will be immediately able to find a job. This is because of the rapid growth that is seen in the private sector in these countries.
Socialist states usually have big government. This means that this government interferes in a lot of spheres of its citizen’s life. Huge sums of money are required in order to maintain a big government. This money is collected in the form of high taxation. Almost all socialist regimes in the world have very high taxation.
Hence, when a government moves from socialism to capitalism, it is essential that the taxes be cut drastically. This will be possible because the government will divest a lot of its businesses. Hence, the need for expenditure will be less, and the cash on hand will be more.
Since the government will release all of its employees in the private sector, it may not have to keep too much cash on hand. Lower taxes are essential for the success of capitalist corporations, particularly in the short run. Hence, taxes need to be kept abnormally low to give capitalism a fillip. Later, once a robust system is in place, the tax rates can be increased.
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What the Current Wave of Protectionism and Populism mean for the Future of Globalization and Free Trade
February 12, 2025
