Reminiscent of Mark Twain's remarks in response to his premature obituary, claims of the death of government due to globalization are greatly exaggerated. Despite such claims, governments everywhere continue to interfere extensively with the lives of their citizens and the economy. Maybe the amount of intervention is less than those of some political persuasions prefer, but often, more than most would.
There has been some improvement in that some governments have become more transparent in what they do. This is evident in the drive for privatization and the increasing momentum for the demands for tax cuts that is taking on a global dimension.
There is little evidence of a global revolt by disgruntled taxpayers. Nonetheless, political leaders are beginning to heed some of the discontent expressed by citizens and investors. Consequently, there are pressures on for a movement toward universal tax harmonization. Cuts in income and corporate taxes will increasingly be necessary to bring tax codes into alignment with the rest of the global economy. With impending tax cuts in the US and elsewhere, it must be remembered that tax policies are a prime consideration influencing inbound foreign investments since multinationals tend to invest in countries with lower and less arbitrary tax rates.
ILLUSTRATION: YU SHA
In measuring the effect of regulations, the following should be included: direct public spending on regulatory bureaucracy plus compliance costs plus "invisible" costs.
Direct costs in the US include budgeted expenditures of US$18 billion plus compliance costs of more than US$758 billion. This total represents an amount equal to 45 percent of the official federal budget. Then the compliance costs in US constitute about 9 percent of GDP or US$7,000 per family. Total spending on regulations is almost same as revenues derived from personal income taxes and is greater than total corporate profits.
The invisible costs of regulation include distortion effects whereby resources are diverted to less productive uses, bureaucratic rigidities that hinder responses to new technology or changes in conditions, and hampering entrepreneurial innovation.
Distortions
These distortions relate to activities that might have been non-economic or irrational but were taken to avoid a tax or take advantage of public-sector subsidies or to evade costs imposed by regulations. As these actions lead to wastes of resources or their diversion from more efficient uses, there will be lower potential for long-term economic or employment growth.
For the US alone, lost output due to regulation is estimated by the Cato Institute to be as much as US$1.3 trillion each year. This daunting figure is not so surprising in light of the fact that the Federal Register includes about 70,000 pages of rules and regulations that affect economic choices.
For example, there are punishments for success. If a business takes on more than a specified minimum of employees, they encounter a raft of taxes and labor market regulations. These latter conditions may include obligations for interacting with trade unions or restrictions on redundancies and dismissals. At the same time, restrictions on immigration and other conditions for employment, including minimum wages or restraints on part-time employment, may cause wage and salary costs to rise precipitously.
In response, businesses that are profit conscious and wish to expand will seek ways around all this. They may relocate to a jurisdiction where the rules are less onerous. While such a move will reduce the tax base, there will also be fewer employment opportunities. Or they may minimize their full-time employees by using overtime or temporary hires or part-time workers.
Companies may choose to remain small to operate off the radar screen of regulators and tax officials. In so doing, they forgo efficiencies derived from economies of scale that would have generated community benefits through reduced resource use.
So important is the effect of regulation that its extent provides a partial answer to why the standard of living rises more rapidly in some countries than others. One puzzle is that socialist economies, like China, can generate high rates of economic growth while many of Europe's welfare state economies spawn successful ventures in high-tech industries.
According to a report from the National Bureau of Economic Research (NBER) indicates one source of difference in found in the regulations concerning startup for firms ("The Regulation of Entry" NBER Working Paper 7892, September 2000). However, lower restrictions on start-ups are not sufficient to insure high economic growth. There must be accompanied by macroeconomic stability and an "institutional infrastructure" (rules of the game) that are in sync with the global market economy.
Government obstacles
These findings suggest that governmental obstacles that interfere with entrepreneurs' freedom to start-up a new business will increase graft and bribery along with boosting the "informal" sector of their economies. It also turns out that despite the stated justifications for regulating start-ups, strict enforcement of regulations does not improve product quality, reduce pollution or improve health measures. Meanwhile, lower levels of regulation of start-ups tend to be linked both to more democratic governments and higher per capita GDP.
The study examined business rules and regulation as well as taxation for 75 countries. It turns out that public officials display great creativity in creating obstacles for new enterprises to form. These include Byzantine procedures that include requirements of lengthy waiting periods, myriad taxes or high fees to start a legal business.
There was a wide range in the number of procedures required for a startup company ranging from Canada with the least (and Australia, New Zealand, the US, Sweden and Ireland near the top) to Bolivia at the bottom, with 20 required procedures. Brazil, Russia, Mexico, France and Vietnam all have excessive impediments to opening a new business.
There are also a number of forces that lead to increased regulation that are not based upon generating benefits for the wider community. On the one hand, the incentives in bureaucracies tend to lead to "over-regulation in the sense that costs exceed benefits. This is because bureaucrats seek larger budgets and more power for their agencies since such growth also promotes their own interests.
On the other hand, some firms may actually encourage government regulation since it can shift some operation costs to the taxpayer and may reduce competition. This is true where quality-monitoring costs can be shifted to the taxpayer as in the case of agriculture or meat processing.
There are many observers and opponents of globalization who portray it as promoting a "race to the bottom" where governments shed regulation that render citizens helpless and unprotected. Yet they should fear not, for Leviathan is alive and well.
Christopher Lingle is Global Strategist for eConoLytics.com and author of The Rise and Decline of the Asian Century.
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