With the looming graduation from Less Developed Country status, attention is turning to what to do next. Obviously, work to become richer yet, but how, exactly, are we to do that?
Part and parcel of that is, as this newspaper suggests, dealing with a culture of corruption and needless bureaucratic red tape. Another part is, again as said, changing that foreign direct investment inflows remain modest compared to even our regional peers. Fortunately, dealing with that first will do much to solve that second. So, let's try to solve it then.
Corruption obviously deters foreigners from investing. One part is -- and I've done this myself in Russia -- that if you're not from a place then you don’t understand who it is that has to be bribed, nor why, in order to be allowed to do something. Further, you don't know whether, having spent the money, you will be allowed to then do what you've just paid to be allowed to do.
Of course, it's not optimal that politicians and bureaucrats have to be paid at all, thereby increasing the costs of doing anything. But this weighs more heavily upon foreigners because, well, they're foreigners. Further, the really big international corporations won't pay bribes these days so a culture that demands them misses out on those.
Red tape, endless bureaucracy, works in much the same way. True, those demanding papers and permissions and permits only gain their normal salaries by doing so, but the effect is much the same as outright bribery: Making everything more expensive to do, making it slower and operating unequally against foreigners as they don't grasp the system.
Getting rid of the corruption and the red tape is a good thing in and of itself. But as it weighs more heavily on foreign investment, getting rid of it gives greater aid to that foreign investment.
Now, corruption requires several things to thrive. One is, obviously, people in power who desire to skim money off the system -- and we all hope that the recent change in governance is aiding us here. But the major issue is that corrupt systems must have pressure points where money can be demanded. That's the system of permissions, permits, and licenses.
The major issue is that corrupt systems must have pressure points where money can be demanded. That's the system of permissions, permits, and licenses
Where politics -- or government, or bureaucracy -- has the power to grant, or not grant, the ability to do something, that's when money can be demanded. Money in exchange for the granting, or not granting, of that permit or license.
So, if we move to a system where anyone can do anything then there is no ability to squeeze money out of those who want to do things. That is, a planned economy offers opportunities for payments to be in accordance with the plan. A free market economy doesn't give those who would like to charge for their permission the need for a permission to be granted -- therefore it cannot be charged for.
Now, clearly, there's a limit to how little permission we're going to want in an economy -- a limit to how few licenses. That a building is built well enough to gain an earthquake, fire, or usage license seems sensible. Even as that obviously does -- as is proven in many places around the world -- the building inspectorate seem to be better paid than their salaries would suggest. But we will probably still insist upon that level of licensing, even as we struggle to make sure it's wholly straight and honest.
But if we get rid of the rules of who may have a factory, what that factory may do, who may enter a particular line of business, and so on, then we steal from the thieves the opportunity to gain from issuing those permits.
Plus, starting a new factory, a new business, becomes cheaper, and so we'll have more of them. This being even more so for that foreign investment we'd like to attract. We thus become richer by requiring less and fewer permission and licenses.
But then it's not exactly a surprise that free markets, without constraints, make us richer now, is it?
Tim Worstall is a senior fellow at the Adam Smith Institute in London.
