utorok, marca 27, 2007

Slashing the Barriers for Competitiveness and Growth


Chris Edwards’s article in the National Review entitled Emerald Miracle nicely outlined the nature of Irish economic miracle widely known as a result of sensible economic policy friendly to capital creation, job growth and economic growth above all. Quite a few observers have claimed that Ireland simply had luck which no other country in Europe had. This assumption has no correlation with real empirical research and economic policy output that galvanized the Irish economy on the path from rags to riches. Competitiveness, which defines the ability of the economy to absorb real competitive advantage compared to other countries, can be measured in several directions, depending on the structure and content of the methodology and undertaken analytical approach. Nowdays, competitiveness is frequently taken as a task needed to be achieved by the goals of macroeconomic policy. Macroeconomic policy mostly relies on ensuring the stability of the public finance to avoid external shocks caused by high spending rates, marginally growing progressive tax rates and expansionary fiscal policy which is usually aimed to expand the redistribution of wealth and income created by productive behavior. Competitiveness can thus be broadly expanded on several areas depending on the use of its factors and variables. As competitiveness depends on the ability of entrepreneurial sector to sustain its ability to respond fluctuations through innovation and strategy performance, the responsibility relies on the role of government and the entrepreneurial sector. Both branches share its part.

As the basis of spontaneous coexistence, well enforced property rights and the functioning of the judicial system is crucial in this respect. Besides saving, investment is essential for economic growth. But if the governance of the institute of property rights works very weakly, no investment and saving can helpfully stimulate the economic growth. The case of Soviet Union explains this relationship very clearly. Soviet Union indeed had one of the biggest GDP shares of investment but, as well all know, it failed due to its inefficiency and the tyranny of central planning. The impossibility of the socialist calculation was thoroughly proven in the works of Milton Friedman and Friedrich August von Hayek. In Slovenia, the weakness of the institute of property rights is one of the foremost disadvantages that causes huge compliance costs to the economy. World Bank’s Doing Business showed that it takes approximately 1350 days in Slovenia to fully enforce commercial contracts. Hence, the judicial system doesn’t function properly. The number of delays is skyrocketing. In principle this seriously endangers the rule of law as justice delayed means justice denied. Contract enforcement is measured through the evolution of payment dispute, and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment. The inefficiency of judicial system can triple the entrepreneurial compliance costs because investment, saving, work and fulfilling obligations becomes more risky as externally caused uncertainty increases the probability of the so called “damaged business”. In consequence, a dysfunction of the rule of law chains a bulk of persisting problems with a heavy impact on productive dynamics which is supposedly the main engine of competitiveness in a global match.

A further question that comes up in judging the guideline of competitiveness is the role of the government. It is a matter of empirical evidence that private sector allocates resources much more efficiently as the government intervention is actually able to. Every freshman student of economics knows that government subsidies (“neighborhood effects”) and handouts can be justified if positive externalities are empirically proven including a solid and dynamic grounding in economic theory, not least in analytical tools. For example, assume that there’s a dispute wheatear the government should subsidize military or should the financing of military services be left to private sector. If cost-benefit analysis, the forefront guideline in decision making, shows that there’re actually positive externalities in financing a military by budget outlays, then the whole action is legitimate and justified. The problem comes up when the government wants greater involvement in business sector. In this case, the macroeconomic policy model is crucial. Tax competition around the world has importantly influenced macroeconomic policymakers in terms of reducing the GDP tax burden through cutting tax rates on corporate and individual income. Government is usually not aware of the consequences of high spending exercised through a vast redistribution of income and wealth. The main problem in the context of macroeconomic policy is how to establish a mechanism of long-term stability of public finance. Because nowdays, budget outlays such as social security and health care expenditure are becoming higher as the population is getting older, the question and the analysis of the long-term macroeconomic projections plays an increasingly essential role. The costs of ageing population and growing GDP spending on such schemes pose a serious risk that seriously threatens the stability of public finance in the long-run. Sweden efficiently avoided the risk of long-term instability of public finance by introducing a private pension accounts wherein individuals contribute nearly a half of total pension contribution. Thus, an important part of burden was replaced by choice options in individual contribution replacement of saving for the old-age. In terms of competitiveness, the decision-making in macroeconomic policy pertains the question of taxation, burden pressure, public debt, and inflation as the monetary phenomena. An environment in which high-tax wedge penalizes businesses for productive behavior is usually globally uncompetitive. Italy is a “case study” in this particular field. High taxation of capital gains, dividends and interest can seriously threaten the propulsive nature of entrepreneurial competitiveness in a global competition. As the abovementioned resources are usually the main driver of future investment, highly pressurized taxation can cause the reduction of investment influx while the economy simply doesn’t benefit from it. The macroeconomic policy is tightly connected with government policy towards the competitiveness. The lack of foreign direct investment in transition countries could be a fatal punch for long-term GDP convergence. When a business sector is usually lacking the resources, the aim of the government to protect domestic investors against foreign direct investment results in a lack of technological development and much needed restructuring in a direction of higher value-added and knowledge-intensive economy which is essential in global competitiveness race. There’s essentially no empirical and practical reason for regulating the market entry point for foreign investors through barriers and administrative obstacles. Another relevant area in which government possesses a very strong role is the regulation of employment. Implemented rigid employment rules supported by collective bargaining between monopoly trade unions and employers again strongly increase the compliance costs and reduce the length of time which individuals are ready to absorb the human capital and adapt it to the productive trajectory in the market. Hence, rough employment regulation represses the flexibility in the labor market as we know that flexibility is defined as a time in which individuals are able to find a job when they lose it.

Competitiveness is of course a microeconomic phenomenon that government cannot achieve through explosive spending and high level of corporate and individual taxation. We should know that innovative and propulsive business models pursue the miracle of competitiveness. The marketing strategy, the supply-chain, the digitalization of business (e-commerce), joint ventures, value added, risk management, market growth, knowledge insensitivity and service quality are some of the fields from the area list of competitive engines that drive the business models ahead of global competition. In the period to come, innovative capacity of business models will fatherly play evenly greater role in the field of international competitiveness. Government intervention, regulation and fiscal planning can’t!

A concluding remark for the government to promote competitiveness is quite simple: “privatize, deregulate and don’t hesitate!”

Rok SPRUK is a supply-side economist and a classical liberal. He lives in Slovenia where he studies economics and business. His fields of professional interest and research are economic growth, international economics, macroeconomics, tax reform, international competitiveness, free trade and globalization. In the field of business he is focused on strategic management, financial markets, business models, marketing and innovation. Rok works for economic freedom, individual liberty, free enterprise and a free society. His ideas, writings and observations are posted on his blog Capitalism & Freedom. You can contact Rok by sending an email to rok.spruk@gmail.com