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The Quest for Growth

Jun 22, 2012 Editorial

 

 

We are told that the “Tripartite Talks” will be reconvened. Rather than trying to score (cheap) political points, we are calling on the leaders of the parliamentary parties not to necessarily shelve their political differences, but perhaps focus more on subjects on which they agree. From their manifestos at least, it would appear that they have a tremendous amount of commonality on their plans for economic growth. Why can’t they begin here?
This is not to say that there are any quick answers, but at least the discussions should help to foster some trust. One of the biggest questions in all of the social sciences is why some countries are rich and some countries are poor, with per capita incomes differing by more than a 100 times from poorest to richest.  The richest countries have per capita incomes above $40,000 per year; the poorest countries have per capita incomes below $400 per year. While there are probably as many answers on ‘economic growth” as there are economists, the following represents one supply-side economist’s view.
The entry levels in the quest to become a rich country are the hardest.  The basic problem is that any government strong enough to stop people from stealing from each other, deceiving each other, and threatening each other with violence, is itself strong enough to steal, deceive, and threaten with violence.  Designing strong but limited government that will prevent theft, deceit, and threats of violence, without perpetrating theft, deceit, and threats of violence at a horrific level is quite a difficult trick that most countries throughout history have not managed to perform.
To see how difficult this is, think of how strong a temptation it is for a sovereign to simply take someone’s accumulated wealth. Our problem is that our first government at independence followed an economic philosophy that justified expropriation.  As long as the rulers of a country regularly succumb to this temptation, no one in that country will work very hard to accumulate wealth unless he or she has some form of special protection from such takings.  Also think of how difficult it is to have a strong enough military to avoid falling prey to the next country over, without having the military take over and run one’s country for its own benefit.
The intermediate levels in the quest to become a rich country are somewhat easier: establishing the rule of law and stamping out corruption.  If unchecked, corruption and the arbitrary decisions that are the antithesis of the rule of law act like huge tax distortions that discourage commerce and industry.
In comparison to the earlier levels, the advanced levels in the quest to become a rich country are a piece of cake: keeping tax rates reasonable while providing key public goods such as roads and other public works, getting monetary policy right, encouraging education and science, and fostering the environmental amenities that are part of what should be counted as “being rich” even though environmental amenities don’t happen to be counted in GDP.
Even governments of countries at advanced levels of development that get the balance of taxing and spending wrong are still doing very well by having in place the basics of preventing  theft, deception and threats of violence; perpetrating only a little theft, deception and threats of violence (except perhaps internationally); maintaining the rule of law and keeping down corruption.  When looking at an advanced country that has very high tax rates, the right question is not “Is it still rich even with high tax rates?” but “Would it be even richer if it had lower marginal tax rates and less regulation?”
There are some European countries that might have what it takes to be much richer than the United States, if only they liberalized their economies by cutting marginal tax rates and loosened regulations that make it hard for new firms to get started.
For us in Guyana, we are still at stage one: we may disagree on the quanta, but we have to control stealing and corruption.

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