Tuesday, January 17, 2012

Powell's secrets

Jim Powell wrote a nice Forbes article, "The Most Important Secret of a Prosperous Economy," filled with his usual brand of thoughtful historical detail. Two paragraphs caught my eye,
Consider, for example, what it’s like trying to start and operate a legal business in Singapore (atop the World Bank’s Doing Business 2012 report on 183 countries) compared with Chad (at the bottom of the list). In Singapore, starting a legal business involves only 3 procedures, whereas in Chad there are 11 procedures. The process takes 3 days in Singapore, 66 days in Chad. It takes 26 days to obtain a construction permit in Singapore, 154 days in Chad. The filing fees, taxes and other costs of starting a legal business are 0.7 percent of per capita average income in Singapore, a dramatic contrast with Chad where such costs amount to 208.5 percent of per capita average income.

In Singapore, an estimated 84 hours are required each year to maintain tax-related records and prepare tax returns, versus 732 hours in Chad. Total taxes consume 27.1 percent of corporate profits in Singapore, 65.4 percent of corporate profits in Chad. Importing a container of goods costs $439 in Singapore, $8,525 in Chad. Exporting a container of goods: $456 in Singapore, $5,902 in Chad. Resolving a bankruptcy takes 9.6 months in Singapore, 4 years in Chad. In Singapore, the recovery rate (cents on the dollar) from a bankruptcy is 91.3 percent, but the recovery rate is zero in Chad. Is anyone surprised that per capita GDP is much higher in Singapore ($50,714) – about 55 times higher – than Chad ($920).
(The World Bank Report itself is a hilarious example of boosterish, glass-is-5%-full NGO writing. You'd think the whole planet was on a steady march of virtuous free-market reforms. But thanks for the data!) 

As we know, this doesn't cover the half of it. In a country regulated to death like Chad, I can't imagine that each of those 11 procedures comes easily as soon as you fill out the paperwork. The dark side, which the World Bank can't talk about, is just how many bribes and connections you need to make all this work.

This little story bears on the "micro vs. macro" question for our current troubles. "Macro" explanations revolve around deficits, money supplies, and so on. "Micro" is... well, like Chad. Surely, Chad's problems will not be solved by stimulus.

In our policy debates, we focus far too much I think on the explicit tax rates and easily measured regulations. "Macro," deficits and interest rates, are easier still.  The dark side of micro stagnation is just too hard to measure. That doesn't mean it isn't there. Running a business in the US isn't that easy anymore either.


  1. It seems, in the process of wandering around the evidence, that the potential strongest effects (i.e. the need to bribe your way into incorporation in Chad, the declining levels of competitiveness in industries protected by tariffs, the deterioration of incentive to work) are the ones that are least quantifiable.

    Chad has institutional problems, and they lead to effects which leave economists hypothesizing. The best way to clear the air of that is probably a round of deregulatory stimulus.

    The U.S. wouldn't be made worse by the same medicine...

    1. We know that under and over regulation and corruption are all bad for the economy. There is nothing in the article or the post to say whether the US is under or over regulated. We do know that the soft corruption of lax regulation of the financial sector in exchange for financial contributions and intellectual cover was and is a huge problem. Send a few thousand Wall Street bankers and hedge fund managers to prison and we will probably see the economy improve (at least I would feel better).

  2. Corruption and excessive regulation are death on free enterprise and prosperity. But the foregoing is a platitude--let's look to anecdotes for confirmation!

    And there are such things as bona-fide market failures; pollution comes to mind. A free market will not solve pollution. Taxes might help, although tell a mother that carcinogens are okay in her neighborhood as they are being taxed.....and suddenly the Tea Partier mom says there is "an exception' in this particular case.

    Actually, the worst abusers of commercial freedoms in the USA are state and local governments. Can you start a push-cart business in your town selling lunches? How about driving a jitney or gypsy cab? Need a barber's license? Need a license to "practice" law? I won't even mention property zoning and land use regs. Want to sell alcohol? While people dance? While people dance nude? Try selling your wine, grown by you across state lines via Internet. Have a distributor license?

    Most state and local governments are in alliance with licensed professions, local industry and public workers to limit competition, not increase it. All the braying by the state's rights crowd ignores that. Right-wing commentators are careful not to notice this truth. The Cochranes of the world should be getting shrill about state and local suffocation of business--but that goes against the grain of the state's rights and right-wing crowd.

    And why are lawyers licensed? If you hire a bad lawyer, do you die? If you hire a bad doctor you may die---but then why are chiropractors licensed by states, when they are just quacks?

  3. Unfortunately, the data are not even correct in many cases. They have been completely wrong in most of the countries on which I work. There is a growing literature on this.

  4. Well, the US is fourth in Ease of doing business, by far the highest ranking big country. Nobody doubts that Chad is over-regulated and badly regulated. That the US is is far from obvious.

    The Tax code is surely too complicated — just about everybody, including the World Bank, agrees with that. But if you think regulations in general are too onerous, you need to make that case. Describing life in the 183rd country doesn't say much about what direction the fourth should move towards.

  5. I don't think anybody denies that we had, have, or will have structural micro problems, just that its the cause of mass unemployment. Yes, we should pay attention to them, but we shouldn't delude ourselves into thinking it will solve the most pressing issues we're facing right now.

  6. JC, you are ignoring the problems created by relaxed regulation. Singapore is over crowded and a poor environment for health and safety.

  7. Professor,

    I would like you to read my response about your post. Thank you:


  8. John, this is good and likely true, but I propose a new question:

    How did it come to be so?

    If all it takes to be rich is less regulation and more business freedom, then we should move on to this equally problematic question. Why has Chad ended up an institutional disaster, while Singapore has gotten things right?

    And I don't mean this to be analyzed with the tools of History but instead those of economics: what incentives lead to the creation of the correct institutions and where must these incentives originate?

    I fear that the answers to these questions may actually put a dent in the conclusions that inspired them.


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.