Economy
Economy
Growth is one of the most important indicators of a healthy economy.
As the country’s GDP is increasing, it is more productive which leads to more people being employed. This increases the wealth of the country and its population. All things being equal, the faster the economy grows, the richer the country gets.
Higher economic growth also leads to extra tax income for government spending, which the government can use to develop the economy. This expansion can also be used to reduce previous spending made to grow the economy. Additionally, as the population of a country grows, it requires the growth to keep up its standard of living and wealth.
Economic growth also helps improve the standards of living and reduce poverty, but these improvements cannot occur without economic development. Economic growth alone cannot eliminate poverty on its own.
The fundamental nature of economic activity only differs from place to place based on the restrictions placed on economic actors. The economy of North Korea is very different from South Korea, despite a similar heritage, people and set of resources. It's public policy that makes their economies so distinct.
What Can Governments Do?
Free Markets: Let individuals make economic decisions, so the laws of supply and demand provide the basis of the economy. Understand that not every individual decision is wise, but in aggregate, all the individual decisions lead to the better outcome. Don’t protect people (or especially companies) from the consequences of their decisions.
Healthy economies need genuinely competitive markets. Competitive markets drive down prices. This frees up resources for a consumer to spend on other goods and services.
That doesn’t happen when a handful of conglomerates control all the key markets.
Control the capital, and you also control the idea flow.
Conglomerates follow a cycle. Innovative in the beginning, over time they become sclerotic bureaucracies with endless rules about “how we’ve always done it.” Budding innovators and entrepreneurs end up as stifled salarymen in conglomerate empires. Japan, South Korea and Hong Kong suffer from this.
Asian family conglomerates are a particular problem. For example, Li Ka-shing is a brilliant businessman. But in 2018, at age 91, he passed the baton to his son Victor. Victor is not useless. But no one believes he would be running the company if his last name wasn’t Li. Among the problems:
1) Those companies, which may represent one-third of Hong Kong’s GDP are now not run as efficiently as they should be. That’s a big loss of economic growth every year.
2) These companies are too big to fail. But, if mediocre progeny run them badly, they will fail. When a company controls a third of the economy, that’s an unacceptable risk. (Note: this applies to Western investment banks, too.)
Eliminate Crony Capitalism: Take Thailand where a fetid elite sits around the king, sucks up all the opportunities and kills competition.
Beer in Thailand is the perfect example. Singha and Chang have a royally licensed duopoly. So, the handful of microbreweries in Thailand generally produce in Laos and pay the 40 percent import duty on beer instead of brewing in Thailand. The result: Thais drink a lot of mediocre beer at a high price, while making the brewers billionaires.
Our metric is the Concentration Ratio. The concentration ratio measures the combined market share of a leading cluster of businesses in a market. A rule of thumb is that an oligopoly exists when the top five firms in the market account for more than 60 percent of total market sales.
The remedy is a competition bureau, which has the power to break-up oligopolies when they have too much market share. However, the competition bureau must be powerful and effective. Thailand has had an antitrust law for 17 years; there has been a total of zero rulings against big business. Hong Kong’s competition bureau has been just as ineffective.
No Nationalization and State Owned Enterprises: Competition drives innovation. Innovation drives prices down (and profits up, which goes to a bank and drives more innovation). Nationalized industries and State Owned Enterprises don’t do that.
Political meddling is inevitable and endemic. Politicians put their friends in charge of running the show. Success is not based on profitability. It’s based on political goals - often around total employment. And failure is impossible to admit, since it’s a political disaster.
Rule of Law: Property rights must be enforced. People will not take the time, effort and energy to build something if someone else can take it. This is why Mainland Chinese move so much money abroad rather than invest in China.
Budding entrepreneurs will be deterred if politicians force their cronies on them as “partners.” Cambodia is especially bad for this.
Contracts must be fair, enforceable and enforcement must be neutral. Justice can’t be based on who you know.
Regulation: Trust is vital in a market. Cheaters and scammers must be deterred and punished. Safe food and water are obviously good.
Training: A skilled labor force has a significant effect on growth since skilled workers are more productive. See our Education Section.
Infrastructure: Businesses need electricity, water, ports, and roads. See our Infrastructure Section.
Minimize Bureaucracy: Growth accelerates and sustains through new companies and new innovations that create new jobs. Building a business is the most difficult thing you can do. Does government make it easier? Or get in the way?
It takes two days to open a business in Hong Kong. It takes 18 in India. It takes 99 in Cambodia.
India’s growth was stifled for decades by the license raj, an elaborate system of licenses, regulations and accompanying red tape that were required to set up and run businesses. This red tape gives corrupt bureaucrats plenty of opportunities to extract extra-legal fees. Bear in mind, part of the problem was the civil service was not properly paid. So civil servants needed those payouts to live. A horrendous system all around.
In Kenya and Ethiopia, patent registration fees are a whopping 13 and eight times the national average income respectively. To put that in perspective: in the U.S., patent registration costs just 0.1 times average income, and in Germany, 0.3. African innovators, who are mostly young with either no job, or a low-paying job, struggle to afford these high fees.
Manage Central Banks: As 2008 taught us, it’s critical that government ensure the integrity and stability of the financial system. Of course, 2008 also shows that vital function tends to be poorly done.
Control of interest and inflation is obviously critical. Political leaders have incentives to jeopardize long-run economic prospects for short-term growth. However, should central banks be independent? If so, how can they be held accountable?
Let the debate begin …
Trade: Genuine free trade benefits all. That’s not what any of the world’s existing trade deals are.
True free trade is simple, since if we agree to open our markets to each other, there’s little to negotiate. Genuinely opening our markets to each other means not subsidizing domestic producers at the expense of better foreign producers. You need an effective identification and enforcement mechanism around that.
So, if a trade deal is more than about ten pages, or requires huge bureaucracies to manage, it’s not free trade. It’s a managed trade deal that advantages some and disadvantages others.
And note that not all of the disadvantaged are “the other side.“ Again, governments tend to reward their friends and punish their enemies. The ASEAN Free Trade Area (AFTA) is an example of a managed trade deal that’s barely better than no deal at all.
Smart Spending: Spending on a port that will grow GDP by three percent is a good investment of the public purse. It’s also fine to go into debt to finance projects like that. Creating generous welfare programs for those who can work but don’t or providing subsidies for politically connected friends and industries is dumb spending. Going into debt for those kinds of programs is catastrophic spending.