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said Luis de la Calle, one of Mexico's chief NAFTA negotiators. Countries that fall

off the development wagon are a bit like drunks; to get back on they have to learn

to see themselves as they really are. Development is a voluntary process. You need

a positive decision to make the right steps, but it starts with introspection.

I Can Get It for You Wholesale During the late 1970s, but particularly after the fall

of the Berlin Wall, a lot of countries started to pursue development in a new way

through a process that I call reform wholesale. The era of Globalization 2.0, when

the world shrank from a size medium to a size small, was the

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era of reform wholesale, an era of broad macroeconomic reform. These wholesale reforms

were initiated by a small handful of leaders in countries like China, Russia, Mexico,

Brazil, and India. These small groups of reformers often relied on the leverage of

authoritarian politicalsystems to unleash the state-smothered market forces in their

societies. They pushed their countries into more export-oriented, free-market

strategies-based on privatization of state companies, deregulation of financial

markets, currency adjustments, foreign direct investment, shrinking subsidies,

lowering of protectionist tariff barriers, and introduction of more flexible labor

laws-from the top down without ever really asking the people. Ernesto Zedillo, who

served as president of Mexico from 1994 to 2000 and was finance minister before that,

once remarked to me that all the decisions to open the Mexican economy were taken

by three people. How many people do you suppose Deng Xiaoping consulted before he

declared, "To get rich is glorious," and opened the Chinese economy, or when he

dismissed those who questioned China's move from communism to free markets by

saying that what mattered was jobs and incomes, not ideology? Deng tossed over decades

of Communist ideology with one sentence: "Black cat, white cat, all that matters is

that it catches mice." In 1991, when India's finance minister, Manmohan Singh, took

the first tentative steps to open India's economy to more foreign trade, investment,

and competition, it was a result not of some considered national debate and dialogue,

but of the fact that India's economy at that moment was so sclerotic, so unappealing

to foreign investors, that it had almost run out of foreign currency. When Mikhail

Gorbachev started dabbling with perestroika, it was with his back up against the

Kremlin wall and with few allies in the Soviet leadership. The same was true of

Margaret Thatcher when she took on the striking coal miners' union in 1984 and forced

reform wholesale onto the sagging British economy.

What all these leaders confronted was the irrefutable fact that more open and

competitive markets are the only sustainable vehicle for growing a nation out of

poverty, because they are the only guarantee that new ideas, technologies, and best

practices are easily flowing into your coun-

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try and that private enterprises, and even government, have the competitive incentive

and flexibility to adopt those new ideas and turn them into jobs and products. This

is why the nonglobalizing countries, those that refused to do any reform

wholesale-North Korea, for instance- actually saw their per capita GDP growth shrink

in the 1990s, while countries that moved from a more socialist model to a globalizing

model saw their per capita GDP grow in the 1990s. As David Dollar and Art Kray conclude

in their book Trade, Growth, and Poverty, economic growth and trade remain the best

antipoverty program in the world.

The World Bank reported that in 1990 there were roughly 375 million people in China

living in extreme poverty, on less than $ 1 per day. By 2001, there were 212 million

Chinese living in extreme poverty, and by 2015, if current trends hold, there will

be only 16 million living on less than $1 a day. In South Asia-primarily India,

Pakistan, and Bangladesh-the numbers go from 462 million in 1990 living on less than

$1 a day down to 431 million by 2001 and down to 216 million in 2015. In sub-Saharan

Africa, by contrast, where globalization has been slow to take hold, there were 227

million people living on less than $1 a day in 1990, 313 million in 2001, and an

expected 340 million by 2015.

The problem for any globalizing country lies in thinking you can stop with reform

wholesale. In the 1990s, some countries thought that if you got your ten commandments

of reform wholesale right-thou shall privatize state-owned industries, thou shall

deregulate utilities, thou shall lower tariffs and encourage export industries,

etc.-you had a successful development strategy. But as the world started to get

smaller and flatter-enabling China to compete everywhere with everyone on a broad

range of manufactured products, enabling India to export its brainpower everywhere,

enabling corporations to outsource any task anywhere, and enabling individuals to

compete globally as never before -reform wholesale was no longer sufficient to keep

countries on a sustainable growth path.

A deeper process of reform was required-a process I would call reform retail.

I Can Only Get It for You Retail

What if regions of the world were like the neighborhoods of a city? What would the

world look like? I'd describe it like this: Western Europe would be an assisted-living

facility, with an aging population lavishly attended to by Turkish nurses. The United

States would be a gated community, with a metal detector at the front gate and a lot

of people sitting in their front yards complaining about how lazy everyone else was,

even though out back there was a small opening in the fence for Mexican labor and

other energetic immigrants who helped to make the gated community function. Latin

America would be the fun part of town, the club district, where the workday doesn't

begin until ten p.m. and everyone sleeps until midmorning. It's definitely the place

to hang out, but in between the clubs, you don't see a lot of new businesses opening

up, except on the street where the Chileans live. The landlords in this neighborhood

almost never reinvest their profits here, but keep them in a bank across town. The

Arab street would be a dark alley where outsiders fear to tread, except for a few

side streets called Dubai, Jordan, Bahrain, Qatar, and Morocco. The only new

businesses are gas stations, whose owners, like the elites in the Latin neighborhood,

rarely reinvest their funds in the neighborhood. Many people on the Arab street have

their curtains closed, their shutters drawn, and signs on their front lawn that say,

"No Trespassing. Beware of Dog." India, China, and East Asia would be "the other side

of the tracks." Their neighborhood is a big teeming market, made up of small shops

and one-room factories, interspersed with Stanley Kaplan SAT prep schools and

engineering colleges. Nobody ever sleeps in this neighborhood, everyone lives in

extended families, and everyone is working and saving to get to "the right side of

the tracks." On the Chinese streets, there's no rule of law, but the roads are all

well paved;there are no potholes, and the streetlights all work. Onthe Indian streets,

by contrast, no one ever repairs the streetlights, the roads are full of ruts, but

the police are sticklers for the rules. You need a license to open a lemonade stand

on the Indian streets. Luckily, the local cops can be bribed, and the successful

entrepreneurs all have their own generators to run their factories and the latest

cell phones to get

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around the fact that the local telephone poles are all down. Africa, sadly, is that

part of town where the businesses are boarded up, life expectancy is declining, and

the only new buildings are health-care clinics.

The point here is that every region of the world has its strengths and weaknesses,

and all are in need of reform retail to some degree. What is reform retail? In the

simplest terms, it is more than just opening your country to foreign trade and

investment and making a few macroeco-nomic policy changes from the top. That is reform

wholesale. Reform retail presumes you have already done reform wholesale. It involves

looking at four key aspects of your society-infrastructure, regulatory institutions,

education, and culture (the general way your country and leaders relate to the

world)-and upgrading each one to remove as many friction points as possible. The idea

of reform retail is to enable the greatest number of your people to have the best

legal and institutional framework within which to innovate, start companies, and

become attractive partners for those who want to collaborate with them from elsewhere

in the world.

Many of the key elements of reform retail were best defined by the research done by

the World Bank's International Finance Corporation (IFC) and its economic analysis

team led by its chief economist, Michael Klein. What do we learn from their work?

To begin with, you don't grow your country out of poverty by guaranteeing everyone

a job. Egypt guarantees all college graduates a job each year, and it has been mired

in poverty with a slow-growing economy for fifty years.

"If it were just a matter of the number of jobs, solutions would be easy," note Klein

and Bita Hadjimichael in their World Bank Study, The Private Sector in Development.

"For example, state-owned enterprises could absorb all those in need of employment.

The real issue is not just employment, but increasingly productive employment that

allows living standards to rise." State-owned enterprises and state-subsidized

private firms usuallyhave not delivered sustainable productivity growth, and neither

have a lot of other approaches that people assume are elixirs of growth, they add.

Just attracting more foreign investment into a country also doesn't automatically

do it. And even massive investments in education won't guarantee it.

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"Productivity growth and, hence, the way out of poverty, is not simply a matter of

throwing resources at the problem," say Klein and Hadjimichael. "More important, it

is a matter of using resources well." In other words, countries grow out of poverty

not only when they manage their fiscal and monetary policies responsibly from above,

i.e., reform wholesale. They grow out of poverty when they also create an environment

below that makes it very easy for their people to start businesses, raise capital,

and become entrepreneurs, and when they subject their people to at least some

competition from beyond-because companies and countries with competitors always

innovate more and faster.

The IFC drove home this point with a comprehensive study of more than 130 countries,

called Doing Business in 2004. The IFC asked five basic questions about doing business

in each of these countries, questions about how easy or difficult it is to 1) start

a business in terms of local rules, regulations, and license fees, 2) hire and fire

workers, 3) enforce a contract, 4) get credit, and 5) close a business that goes

bankrupt or is failing. To translate it into my own lexicon, those countries that

make all these things relatively simple and friction-free have undertaken reform

retail, and those that have not are stalled in reform wholesale and are not likely

to thrive in a flat world. The IFC's criteria were inspired by the brilliant and

innovative work of Hernando de Soto, who has demonstrated in Peru and other developing

nations that if you change the regulatory and business environment for the poor, and

give them the tools to collaborate, they will do the rest.

Doing Business in 2004 tries to explain each of its points with a few colorful examples:

"Teuku, an entreprenuer in Jakarta, wants to open a textile factory. He has customers

lined up, imported machinery, and a promising business plan. Teuku's first encounter

with the government is when registering his business. He gets the standard forms from

the Ministry of Justice, and completes and notarizes them. Teuku proves that he is

a local resident and does not have a criminal record. He obtains a tax number, applies

for a business license, and deposits the minimum capital (three times national income

per capita) in the bank. He then publishes the articles of association in the official

gazette, pays a stamp fee, registers at the Ministry of Justice, and waits 90 days

before filing for

social security. One hundred sixty-eight days after he commences the process, Teuku

can legally start operations. In the meantime, his customers have contracted with

another business.

"In Panama, another entrepreneur, Ina, registers her construction company in only

19 days. Business is booming and Ina wants to hire someone for a two-year appointment.

But the employment law only allows fixed-term appointments for specific tasks, and

even then requires a maximum term of one year. At the same time, one of her current

workers often leaves early, with no excuse, and makes costly mistakes. To replace

him, Ina needs to notify and get approval from the union, and pay five months'

severance pay. Ina rejects the more qualified applicant she would like to hire and

keeps the underperforming worker on staff.

"Ali, a trader in the United Arab Emirates, can hire and fire with ease. But one of

his customers refuses to pay for equipment delivered three months earlier. It takes

27 procedures and more than 550 days to resolve the payment dispute in court. Almost

all procedures must be made in writing, and require extensive legal justification

and the use of lawyers. After this experience, Ali decides to deal only with customers

he knows well.

"Timnit, a young entrepreneur in Ethiopia, wants to expand her successful consulting

business

by taking a loan. But she has no proof of good credit history because there are no

credit information registries. Although her business has substantial assets in