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This article was written on 06 Oct 2012, and is filled under Editorial, General.

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Ten Questions to help you fix your own economy

Although I have written about the problem of government stimulus, I also recognise that removing government is about as likely as British Universities crowding out the global top ten university list.  Therefore, for those who are interested (or just benignly curious) here are ten questions that a policy maker could or should ask himself/herself to help fix their own economy. I’ll give you a hint, ‘How can I do more Quantitative Easing?’ is not one of them.

Yeah, I don’t think it’s gonna work Ben

Question 1. What is your Five-year average PISA score?

PISA, for the uninitiated is a OECD issued test score that attempts to rank the education of countries. Now although its data collection is disputable, it is a reasonable barometer on the global quality of education. Certain countries that used to top this list, America, the UK, Bulgaria have since descended from it. Especially in this period of online resources, there is wide scope for building the brains of tomorrow. This has been shown in charter schools in New York, Washington DC and Finland. It won’t fix your economy today, but it could certainly help fix it tomorrow. Here is a video done by the OECD about Strong Performers in the recent PISA tests, starting with Singapore, known not only for good scores, but high student satisfaction.

Question 2. What is the state of your national infrastructure?

The jolt in the arm that people have been jumping up and down about is the old Keynesian adage of public works. Whilst public works have a disputable reputation, encouraging Private Sector funds to provide newer or expand existing infrastructure is useful. Especially in bottleneck areas, it does add capacity.

There are a few caveats to this. Firstly, this does not mean you should bridges to nowhere (Alaska, Japan etc). It wastes money, time and isn’t helpful. Secondly, don’t just talk about it, create a system that encourages participants. There are many Sovereign Wealth Funds who are dying to take part but lack the means to do so (see this paper by Ashby Monk here and his blog post at Institutional Investor). Thirdly, execution is key. The following diagram is a great example of the economic feedback that one can face with building a High Speed Rail Network, the current flavour du jour.

 

Causality Diagram of building High Speed Rail

At least someone bothered to draw a pretty picture

MIT has done an excellent Literature Review on High-Speed Rail which can be read at the link provided. See Page 7.

A good example is the new Energy roadmap that the Japanese government has published. Aside from the slightly nonsensical ideal of removing nuclear power ( that is for another day and another time), there is a lot of scope for both energy diversification and creating a proper national grid. Large infrastructure like this would create healthy bond issues as well as equity raising opportunities. This is very good for topping up your depleted pension funds.

Question 3. Where do you rank in terms of competitiveness?

Every year there are indices published that rank countries according their competitiveness. Whether it is the World Bank, the Heritage Foundation or other metrics compiled by groups like the Economist (sigh). Granted, to reach the ungodly heights of city states like Singapore or Hong Kong is difficult but that doesn’t mean policymakers can’t learn. Japan, as I mentioned in a previous post, could do a lot to streamline its business registration possibilities. Heck, if Korea with its militant unions can, many countries have a shot at that.

Question 4. Have you got a crime or security problem?

This is somewhat a rhetorical question as everybody has a crime or security problem, except maybe Monaco after the 1980s. Certain things, such as reviewing criminal sentencing guidelines like Portugal’s controversial legislation on drugs can work but only go so far. Sao Paulo is a good example. Aside from the traffic problems, there is a booming trade in bullet proof cars and security services. This is money that, if the city was safer could be deployed towards better sanitation and other facilities. Let us not even begin to talk about Johannesburg or the Central American states. However, in their defence, economic growth isn’t the problem.

Violent Crime Cartoon

Well, it would be helpful if CERTAIN Streets had this sign

Crime is always controversial as it always invites problems. What type of crime? The methods needed to tackle organised crime is different to what is required to making women feel safe walking home at night. This is again different to how one should treat tax evaders. Likewise, when times are tough policy makers try and jump for emergency fixes. Legalising gambling is a great example where externalities are not necessarily bourne by the introducing region, but by its neighbours. It also does not create many actual jobs.


Question 5. How easy is it for Research and Development in the Private Sector to collaborate with public or educational institutions?

In modern R&D, Certain projects are too big for one organisation. Gone are the days when the gentleman or lady scientist in their country estate could fathom new medical achievements (not quite,  but hear me out). Whether it is because of capital expenditure, or just sheer complexity,  certain projects are not cost-effective as in-house operations. For these reasons and others firms as well as non-private sector institutions may wish to collaborate for product development. This has proven to be a fruitful endeavour but also a prickly one. Should researchers get a cut of the technology they help develop? If a company commissions research how much should they pay? What about spinning off companies from initial government-backed research projects? There is a minefield of rules, etiquette and dogma that is holding back pioneering new developments. Until comparatively recently, a university was just for ‘education’ not as an engine for job creation, despite the age-old ivory tower politics that invalidated this idea. Likewise, monolithic organisations such as NASA have wasted billions of dollars which could have been saved had they encouraged greater private sector involvement through a coherent ‘procurement contract’ regime.

Question 6. How easy or tough are your immigration rules?

One of the most overlooked, or should I say negatively stereotyped areas in the eyes of a policymaker is immigration. On the one hand you can’t open the gates lest your domestic checks aren’t up to muster (Japan and South Korea spring to mind), yet it has been shown that immigrants are an engine of growth. One proposes a two-way solution. Greater trade development with other countries creates a potential job market for your own citizens and allows greater immigration. Further still, a sensible visa system such as the Canadian or Australian points-based regime allows you to let in qualified individuals. Quotas are far too politicised. Likewise, if one does not have capacity to allow in immigrants due to language barriers etc. you need to think of ways of scaling this up. Finally, greater effort has to be made to a) curb the abuse by immigrants of the domestic legal framework (benefit scoundrels etc) and b) a more hostile anti-xenophobic movement is required. There is ample evidence of good immigrants of all races who have contributed greatly to their new homeland.

Illegal immigration Cartoon

People going under fences to get to America

Question 7. What legal issues exist that could be simplified?

Going back to our Infrastructure point, especially in OECD states, there is a plethora of wasteful regulation. In Russia in the 1990s, there was a plethora of contradictory regulation. In the west there is a plethora of economic necessities and legal barriers. Land use is one. One reason why the highly successful Raspberry Pi project was produced in Asia was because the cost of importing components and to assemble the final product jacked-up the cost, whilst this was non-existent in Asia (you can the blog post where they finally got it moved to the UK here).

Raspberry Pi Made in the UK Board

Nice board, too bad it took them so long to make it in the UK!

While politicians are grand-standing about epic market moving stimulus packages, nothing is done about the real barriers to business development. I am not advocating that policymakers should cave into excessive private sector demand but sometimes the most idiotic policies suffocate an already sclerotic system. Greece, subject to much discussion about debt, has done almost zero to change its business rules and regulations. Yes, pretty much zero. Setting up a business in Greece prior to the bailout was a nightmare and it still is. In Japan, although much was done on banking regulation, very little has been done to increase the number of accountants and lawyers required to keep checks and balances functioning.

Question 8. What is your current tax arrangement?

No, this is not yet another fool trying to argue that low taxes on the rich will create jobs. However, they do help reduce the tax deficit. Certain governments, like the UK have recognised that exempting the lowest paying tax payers is quite sensible. However, they compensate their good idea with a harsh 50%+ tax on the top earners. This is nonsense, all it does is create work for tax accountants and lawyers. It is high time people stop thinking they can ‘hunt the rich down’. It doesn’t work. Ceasing property results in capital flight and killing the rich (as in the USSR) merely frightens other useful people out of the country (indeed the Russian Federation has arguable never recovered from this). A coherent, sensible AND SIMPLE tax regime will always bring more money than convoluted political ideology.

Question 9. How transparent is decision-making in government agencies?

As has been seen in various public sector tendering exercises, there is a distinct lack of transparency amongst government and quasi-government entities. The EU has yet to produce a properly audited set of accounts and the Japanese government throughout the 1990s redacted any economic research that showed government policy in a bad light. In China, there is mounting speculation about how much debt the Ministry of Railways is under (as are the other Ministries of Transport).

In South Africa, NGOs, State Organisations and Private Sector organisations must issue public accounts that adhere to a triple bottom-line accounting principle. Triple Bottom line advocates the accounts show a financial, local and environmental impact of the activity. Greater transparency leads to greater accountability. This makes it harder for mis-demeanours to be hidden and easier to rectify them as there is a paper trail.

Furthermore, this reinforces the legitimacy of the state, which is critical in times of crisis. Public engagement and education allows these agencies to operate better. At the end of the day the government must provide goods and services to its citizens. It is therefore only rational that, like a company, the government should be audited and held accountable in the same way.

Question 10. Who are you protecting and why?

Special Interest groups dominate the political landscape all over the world. Whether it is the young of China, the farmers of France and Japan or the manufacturing unions of South Korea and, yes the landed gentry of Latin America, all these groups are distorting the political system. Politicians, despite what we may think, can be very shrewd and capable individuals. However, equally they have shown themselves to be reluctant to resolving these ‘lobbyists.’ This has had and will have tragic consequences.

As the result of Public sector workers refusing salary reductions or freezes, the likelihood is that France, and certain states of the US, will end up terminating large groups of these people who will lose everything. Brinkmanship is wonderful in fiction, but it ultimately won’t hold in the face of market forces. The same is true of ‘gold-plated’ pension arrangements. Unless a coherent strategy is developed no one will have a pension and it will all boil down to our own savings, taking us back to the 1800s and early 1900s.

Thanks for reading and please feel free to leave feedback and comments in below.

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