Tacna is an industrial park set up by Peru’s government. It even offers exemption from corporate income tax. Yet Tacna stands empty. Why? Because of the red tape for setting up there.
I read this recently in The Economist, discussing Latin America’s economic stagnation. The article also mentions that to build a gas pipeline in Peru requires 4,102 separate permits.
We constantly hear about world poverty and inequality, and remedies as economically clueless as they are radical. But the more I learn how the world actually works, the larger looms the unsexy yet critical issue of excessive regulation.
First of all, “unfettered capitalism” is a straw-man caricature. Nobody believes business should have no restraints. Just as individuals are subject to societal laws, against littering and murder, to protect us all, so too for businesses.
But that actually concerns only a tiny fraction of business regulations. They have a natural tendency to metastasize, with the idea that if a little regulation is good, more is better. Thus we get OSHA regulating how many inches apart a ladder’s rungs must be.
There is a psychology that fears and hates life’s uncertainty and disorder, imagining they can be controlled with sufficient regulation. And believes “society” somehow knows better than individuals and should supplant their decisions and choices, putatively to make a more orderly world.
But there’s a huge downside. Like in Peru’s case, all this regulation stifles economic activity. My local newspaper, the Times-Union, recently had a piece very revealing about how New York’s governmental regulation impedes would-be small business entrepreneurs.
Over-regulation is much worse in many other countries, especially – seemingly counter-intuitively – poorer ones, making it difficult if not impossible to do business. Many have sought to emulate the rich nations in establishing elaborate bureaucratic rule-books, indeed outdoing them in an orgy of regulation for regulation’s sake.
You think I exaggerate. But look at Peru; Nigeria; Egypt. India is the standout poster boy, with a jungle of nonsensical rules (the “License Raj”), many actually the product of an anti-business mentality. For example, that same Economist issue elsewhere mentions an Indian law banning storage of large quantities of various commodities – supposedly to deter “hoarding.” It actually deters investment in warehouses and cold storage, so much farm produce just rots (in the land with the most malnourished people on Earth).
Also, some poor countries intentionally create a morass of fiddly rules to give officials opportunities to extort bribes to bend or overlook those rules. Or else rules may be well intentioned but fall victim to the law of unintended consequences. Many nations (especially in Europe) have regulations making it difficult and costly to fire employees. The aim is job security. But the result is unemployment because businesses become reluctant to hire people in the first place.
In many places it’s so difficult and costly to comply with all the nitpicking regulations that businesses just give up and operate, if at all, in the black market – limiting their access to finance and growth, and of course neutering the consumer safeguards regulation ought ideally to provide. No way to run an economy.
If you have scant sympathy for the businessmen stymied by over-regulation, consider all the jobs that might otherwise be created. And how much regulatory costs add to the prices of goods and services purchased by the poor. Those prices are also inflated by lack of business competition – another true aim of much regulation, at the behest of politically powerful firms. (Taxi companies worldwide are mobiilizing to squelch the competitive threat of Uber – often by means of regulation.)
Bottom line: over-regulation hurts the poor. It limits their opportunities to rise to better lives through honest toil and commerce, and aggravates inequality. This is a bigger issue than anything in Piketty.
The world (and especially its poorest) would – literally – be better off with no regulation of business (apart from obvious criminality like fraud). Wouldn’t many people be harmed? Certainly. But that would be vastly outweighed by the benefits of more jobs, lower prices, more goods produced more cheaply and more consumption, thus overall greater economic growth.
This isn’t just theoretical. I give you China – despite its “Communist” label (and authoritarianism), China in fact is the closest thing in the world to that mythical creature, “unfettered laissez faire capitalism.” It’s a wild west where private business is just about not regulated at all. Yes, there have been some scandals. But China’s average real-dollar per-person income has soared, since 1979, more than THIRTY-FOLD – over 3000%. Human betterment on a vast scale, unprecedented in history, with hundreds of millions rising out of poverty. That’s what you get with no business regulation.
So what about the “hot sex” of my title? Well, no one (few anyway) would read something prosaically titled “Regulation and poverty.”