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Government Regulation Hurts — In More Ways Than One September 15, 2006

Posted by federalist in Regulation.

Mary O’Grady has an interesting column today in the WSJ, “Doing Business in Latin America.”  She summarizes the World Bank’s “Doing Business” report, which looks at the regulatory policies and tax climate of 175 countries:

The 2007 edition was released last week and, not surprisingly, finds that poor countries could be much better off if only they would stop discouraging legal, tax-paying business activity.

When governments make it expensive to operate in the legal sector, small and medium-sized businesses go underground, giving up economies of scale, the benefits of technology and productivity gains. Governments have to rely more and more on large companies for tax revenues and high tax burdens take a toll on competitiveness. Growth rates suffer. Joblessness and poverty persist.

I hadn’t considered these indirect costs of regulation.  It’s obvious that increased regulation will stifle the creation of new enterprises and reduce the international competitiveness of existing ones.  But it also increases the incentives for entrepreneurs to operate underground businesses, where they lack not only economies of scale but also legal protections and access to capital (at least on the same terms as the governmentally sanctioned economy; I guess there’s always organized-crime tactics).

This actually seems quite paradoxical: The fundamental market enablers are government protections of property and contracts.  So if you’re trying to develop your country from the ground up you start with those principles and presumably hope to enhance things as you go from there, right?  How is it that so many developing countries have overshot and produced such stifling levels of government interference in business?  Some of these figures are really boggling:

Guatemala and Peru also made the top 10 list of most reformed. But both are still far from exhibiting respect for their entrepreneurial populations. In Guatemala, for example, the bank says that to complete the process of licensing a business takes 23 steps, 390 days and costs 496.47% of income per capita. In the category of “trading across borders,” researchers found that importing a container costs $1,985 versus an OECD average of $883. It takes 1,459 days and 36 steps to enforce a contract.

Peru moved up 13 places, but it still ranks a lowly 158th in the regulatory burden of “employing workers” and 135th in “paying taxes.” For a medium-sized business to be tax compliant in Peru requires 53 payments, taking 424 hours and costing 40.80% of gross profit. Like its neighbors, Peru doesn’t need foreign aid. It needs a leader to take a machete to its red tape.




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