A few months ago a well-meaning minister asked me if I had any ideas about how the government might help business. In an unguarded moment, he admitted that he had once been a socialist, but had now converted and wished to help the private sector.
I gently suggested that he first take the Hippocratic oath, which doctors used to take in the old days. The oath says, "First, do no harm," and reminds them that a visit to the hospital might make the patient worse off rather than better.So, the best way to help the private sector is oddly enough not to help it. If he was serious, I added, the best thing he could do is to review all the controls that had piled up in his ministry over the forty years of 'licence raj' and eliminate most of them. I would then cheer his bonfire of the vanities.Our politicians and officials would do well to read Robert Anderson's forthcoming book, Just Get Out of the Way. An advisor to many governments, including Russia , New Zealand , and the US , he offers examples to illustrate his title.
One of them is of Bangladesh 's Board of Investment. Meant to encourage foreign investment and help investors find their way through the thicket of government licenses and regulations, it turned out to be a disaster
Manned by civil servants who had spent their entire careers regulating the private sector, they didn't know where to begin. So, they decided their job was to approve the qualifications of foreign investors and review the quality of their business plans before they would be allowed to invest.
Thus, they thought, they would keep out dishonest and incompetent investors. As a result, of course, the Board drove away the few genuine investors who were truly interested in Bangladesh . It's chairman was so impressed by his performance that he proposed that his Board should now encourage domestic investment in the same way.
Anderson shows repeatedly how government policies to help the private sector often do harm. The reasons are usually the same: 1) civil servants don't understand business; 2) corruption is pervasive; and 3) interest groups tend to hijack sensible policies.
In India , for example, our well-intentioned policy to help small businesses got translated into reservations for the small scale sector. This prevented larger, more capable companies from entering 800 industries and building an export base, in the same way as the East Asian countries.
This single policy probably did more to kill our industrial revolution as anything else. The government, however, instead of promoting competition, often does the opposite: it creates public sector monopolies; keeps tariffs too high, and this discourages competition from abroad.
Of course, Anderson is naive to think that governments can just get out of the way. We need institutions and the government helps create institutions that allow markets to flourish. For example, banks in India can now take over the property of those who default on loans.
This reform has done more to strengthen property rights, improve enforcement of contracts, and deter crooks. Unfortunately, crooks still get away, for example, by simply bouncing a cheque!
So, the best way governments can help is to create transparent institutions, which is what our economic reforms are all about, and it's shocking that so many sensible people keep opposing them.