http://www.fff.org/freedom/fd0506g.asp
What makes nations wealthy?
One of the most basic lessons of economics is that people must produce in order to consume. With that truth as a starting point, Lewis proceeded to ask what some countries are doing right and others are doing wrong. Paying no heed to the ¡§conventional wisdom,¡¨ some of his main conclusions are:
# If poor nations take care of their production problems, then (and only then) will the capital they need for modernization flow in.
# Education is not immediately important ¡X since workers learn most of what they need to know on the job, pouring resources into formal schooling is unnecessary.
# Distorting markets to achieve ¡§social equity¡¨ is a bad idea.
# Distortions in competition in product markets are much more damaging than are labor- and capital-market problems.
# Today¡¦s big governments in poor countries are a great handicap that today¡¦s rich countries did not have when they were at a similar stage of development.
# Consumers are the only political force that can stand up to producer interests, big government, and the technocratic, political, business, and intellectual elites.
Brazil
The details Lewis provides about the countries he studied are fascinating. Brazil, for instance, is a nation divided between an affluent, ¡§First World¡¨ sector and a desperately poor ¡X and much larger ¡X ¡§Third World¡¨ sector. The big cities gleam with modern buildings, but they¡¦re ringed by miles of pitiable slums. Most of the nation¡¦s commerce is carried out in the ¡§Third World¡¨ sector, which is beyond the reach of the taxing authorities. The problem that creates is that in order for the state to collect the taxes it needs for its prodigious expenses ¡X Lewis points to, among other things, the ridiculously generous pensions paid to government workers ¡X taxes are very high on the relatively small number of ¡§formal¡¨ businesses. That high taxation prevents them from expanding.
Here we get back to the theme of productivity. Formal business enterprises are far more efficient than are informal, ¡§off the books¡¨ ones. They make use of economies of scale to produce more consumer value for the resources used than informal businesses can. The trouble is that the heavy burden of taxation wipes out their competitive advantage. Thus, big government keeps most of the Brazilian economy stuck with the same kinds of businesses as existed 300 years ago. So if you feel sorry for the poor and want to see their lives improve, instead of looking to more government programs as the solution, you should favor a dramatic downsizing of the Brazilian state.
Russia
Lewis also gives us a fascinating chapter on Russia. While communism has been officially buried, its ghost haunts that country at every turn with market distortions that are ruinous to economic progress. ¡§Russia distorts the ground rules for competition to such an extreme that businesses do well not because they do better, but for other reasons,¡¨ he writes. Resources remain trapped in inefficient enterprises that have changed little since the Soviet era, because local governments order unproductive firms not to shut down.
The steel industry is a good example. Many Russian steel mills are technologically obsolete, only 30 percent as efficient as American firms, and environmentally destructive to boot. In a rational economy, those plants would have shut down years ago. They can¡¦t even pay for their use of energy. Local governments, however, control the distribution of energy and they don¡¦t want ¡§their¡¨ industries shutting down. Therefore, Lewis says, ¡§The steel plants pretend to pay the local distribution companies with barter goods whose value is grossly overstated.¡¨ To make matters worse, the underemployed steel workers won¡¦t relocate in search of better jobs because ¡§the registration system ties social benefits to the worker¡¦s current residence. Thus, workers have a disincentive to move anywhere.¡¨
The steel industry is just one of many where government policy props up inefficient businesses and thereby obstructs the growth of modern, state-of-the-art firms. Even if the international food-retailing giant Carrefour, for example, wanted to enter the Russian market, it couldn¡¦t make any money in the country¡¦s terribly distorted economy.
India
India is another pathetic picture, captured in ugly detail by the author. To give just one instance of India¡¦s hostility to the free market, the nation has a ¡§small-scale reservation¡¨ law that restricts investments in fixed assets to $200,000 for firms producing more than 50 percent of their output for the domestic market. The idea is to protect existing producers against competition from larger and more-efficient businesses. In India, the great enemy of modern productive efficiency is, Lewis writes, ¡§Gandhi¡¦s reverence for the traditional, self-sustaining Indian village.¡¨ While Indians who leave the country often prosper, the country is stuck in an antiquated rut, thanks to government policy.
