Mon, Dec 29, 2014 - Page 9 News List

The productivity of trust between governments, private sectors

By Ricardo Hausmann

Nobel laureate economist Paul Krugman once said: “Canada is essentially closer to the United States than it is to itself.”

After all, most of its citizens live in a narrow band along the more than 4,800km-long border. Most Canadians live closer to more Americans than they do to other Canadians.

The same can be said of corporations and governments. Most firms are closer to the government than they are to other firms: they interact with government rules and agencies more than they do with the rest of the business community. The quality of that interaction and its evolution over time is probably the most fundamental determinant of a nation’s potential for growth and prosperity.

However, this is not the Weltanschauung — the worldview — that permeates private-sector discourse, especially the views expressed by most chambers of trade and industry and business associations around the world.

Business organizations often hew to Ronald Reagan’s dictum: “Government is not the solution to our problems; government is the problem.”

It is a great sound bite: short, recursive, and somewhat poetic. Unfortunately, it is also dangerously misleading. After all, even if government were the problem, then changing what it does must be part of the solution.

The truth is that markets cannot exist without governments, and vice versa. Governments are essential to the establishment of security, justice, property rights and contract enforcement, all of which are essential to a market economy.

Governments must also organize the provision of infrastructure for transportation, communication, energy, water and waste disposal. They run and regulate healthcare systems and primary, secondary, tertiary and vocational education. They create the rules and provide the certifications that allow firms to assure their customers, workers and neighbors that what they do is safe. They protect creditors and minority shareholders from miscreant managers — and managers from impulsive creditors.

Saying that governments should get out of the way and let the private sector do its thing is like saying that air traffic controllers should get out of the way and let pilots do their thing. In fact, governments and the private sector need each other, and they need to find better ways to collaborate.

The problem is that in many nations, both developed and developing, the current relationship between the private sector and the government is often dysfunctional. Not only is it characterized by deep distrust, but the broader society does not find a closer relationship to be either legitimate or in the public interest, and for good reason.

The private sector often engages with the government in order to make itself more profitable. After all, maximizing profits is what chief executive officers are supposed to do, and the government has ways to help: It can force suppliers to sell their inputs more cheaply, repress workers’ wage demands, protect the final market from competition by imports or new entrants, or lower their taxes.

However, these schemes make firms more profitable by making their suppliers, workers and customers poorer. Accepting such demands makes the government rightly illegitimate in the eyes of the rest of society, which cherishes higher priorities than redistribution in favor of the already rich.

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