The pro­duc­tiv­ity of trust

Financial Mirror (Cyprus) - - FRONT PAGE -

The Nobel lau­re­ate economist Paul Krug­man once quipped that “Canada is es­sen­tially closer to the United States than it is to it­self.” After all, most of its cit­i­zens live in a nar­row band along the more than 3,000-mile­long bor­der. Most Cana­di­ans live closer to more Americans than they do to other Cana­di­ans.

The same can be said of cor­po­ra­tions and gov­ern­ments. Most firms are closer to the gov­ern­ment than they are to other firms: they in­ter­act with gov­ern­ment rules and agen­cies more than they do with the rest of the business com­mu­nity. The qual­ity of that in­ter­ac­tion and its evo­lu­tion over time is prob­a­bly the most fun­da­men­tal de­ter­mi­nant of a coun­try’s po­ten­tial for growth and pros­per­ity.

But this is not the Weltan­schau­ung – the worldview – that per­me­ates pri­vate-sec­tor dis­course, es­pe­cially the views ex­pressed by most cham­bers of trade and in­dus­try and business as­so­ci­a­tions around the world. Business or­gan­i­sa­tions of­ten hew to Ron­ald Rea­gan’s dic­tum: “Gov­ern­ment is not the so­lu­tion to our prob­lems; gov­ern­ment is the prob­lem.”

It is a great sound bite: short, re­cur­sive, and some­what poetic. Un­for­tu­nately, it is also dan­ger­ously mis­lead­ing. After all, even if gov­ern­ment were the prob­lem, then chang­ing what it does must be part of the so­lu­tion.

The truth is that mar­kets can­not ex­ist with­out gov­ern­ments, and vice versa. Gov­ern­ments are es­sen­tial to the es­tab­lish­ment of se­cu­rity, jus­tice, prop­erty rights, and con­tract en­force­ment, all of which are es­sen­tial to a mar­ket econ­omy.

Gov­ern­ments must also or­gan­ise

the pro­vi­sion of in­fra­struc­ture for trans­porta­tion, com­mu­ni­ca­tion, en­ergy, wa­ter, and waste dis­posal. They run and reg­u­late health-care sys­tems and pri­mary, sec­ondary, ter­tiary, and vo­ca­tional ed­u­ca­tion. They cre­ate the rules and pro­vide the cer­ti­fi­ca­tions that al­low firms to as­sure their cus­tomers, work­ers, and neigh­bours that what they do is safe. They pro­tect cred­i­tors and mi­nor­ity share­hold­ers from mis­cre­ant man­agers (and man­agers from im­pul­sive cred­i­tors).

Say­ing that gov­ern­ments should get out of the way and let the pri­vate sec­tor do its thing is like say­ing that air traf­fic con­trollers should get out of the way and let pi­lots do their thing. In fact, gov­ern­ments and the pri­vate sec­tor need each other, and they need to find bet­ter ways to col­lab­o­rate.

The prob­lem is that in many coun­tries, both de­vel­oped and de­vel­op­ing, the cur­rent re­la­tion­ship be­tween the pri­vate sec­tor and the gov­ern­ment is of­ten dys­func­tional. Not only is it char­ac­terised by deep dis­trust, but the broader so­ci­ety does not find a closer re­la­tion­ship to be ei­ther le­git­i­mate or in the pub­lic in­ter­est, and for good rea­son.

The pri­vate sec­tor of­ten en­gages with the gov­ern­ment in or­der to make it­self more prof­itable. After all, max­imis­ing prof­its is what CEOs are sup­posed to do. And the gov­ern­ment has ways to help: It can force sup­pli­ers to sell their in­puts more cheaply, re­press work­ers’ wage de­mands, pro­tect the fi­nal mar­ket from com­pe­ti­tion by im­ports or new en­trants, or lower their taxes.

But th­ese schemes make firms more prof­itable by mak­ing their sup­pli­ers, work­ers, and cus­tomers poorer. Ac­cept­ing such de­mands makes the gov­ern­ment rightly il­le­git­i­mate in the eyes of the rest of so­ci­ety, which cher­ishes higher pri­or­i­ties than re­dis­tri­bu­tion in favour of the al­ready rich.

Out­comes would be very dif­fer­ent if the fo­cus of the re­la­tion­ship were pro­duc­tiv­ity rather than prof­itabil­ity. Pro­duc­tiv­ity im­prove­ments, by low­er­ing costs, al­low firms to pay their work­ers and sup­pli­ers bet­ter, re­duce prices for con­sumers, pay more in taxes, and still make more money for their share­hold­ers. A fo­cus on pro­duc­tiv­ity is win­win-win.

Gov­ern­ments can do many things, in a va­ri­ety of ar­eas, to raise pro­duc­tiv­ity. Fresh pro­duce re­quires a cold-stor­age lo­gis­tic sys­tem, a green lane at cus­toms, cer­ti­fi­ca­tion of good agri­cul­tural prac­tices, and san­i­tary per­mits. Tourism de­pends on sen­si­ble visa re­quire­ments, con­ve­nient air­ports, road signs, ho­tel con­struc­tion per­mits, and the preser­va­tion of cul­tural sites and coast­lines. Man­u­fac­tur­ing re­quires ded­i­cated ur­ban space that is ad­e­quately con­nected to power, wa­ter, trans­port, lo­gis­tics, se­cu­rity, and a di­verse la­bor force.

All of th­ese pro­duc­tiv­ity-boost­ing in­puts re­quire in­sti­tu­tions that teach and ex­tend in­dus­try-rel­e­vant knowl­edge and skills. None of them ap­pears in the World Bank’s Do­ing Business in­di­ca­tors or the World Eco­nomic Fo­rum’s Global Com­pet­i­tive­ness In­dex. And yet, with­out th­ese pub­lic in­puts, the in­dus­tries that de­pend on them can­not suc­ceed.

That is pre­cisely what hap­pens in the ab­sence of a sound and le­git­i­mate ba­sis for co­op­er­a­tion be­tween the gov­ern­ment and the pri­vate sec­tor. The re­sult is in­ad­e­quate pro­vi­sion of pub­lic goods that raise pro­duc­tiv­ity and make ev­ery­one bet­ter off.

To cre­ate such a ba­sis for co­op­er­a­tion, many coun­tries need a new com­pact be­tween the gov­ern­ment and the pri­vate sec­tor. This will not be pos­si­ble if business groups in­sist on putting taxes at the cen­ter of the dis­cus­sion. In­stead, they should fo­cus on mea­sures that raise pro­duc­tiv­ity.

More broadly, business groups should seek only those gov­ern­ment poli­cies that are un­am­bigu­ously in the pub­lic in­ter­est. De­mands that are per­ceived as greedy erode le­git­i­macy and, ul­ti­mately, ef­fec­tive­ness. In this con­text, watch­dog NGOs ded­i­cated to scor­ing the pub­lic-in­ter­est value of what business groups ask for from the gov­ern­ment could fa­cil­i­tate trust.

Per­haps most im­por­tant, business as­so­ci­a­tions do their mem­bers a dis­ser­vice by seek­ing to im­pose on them a sin­gle voice. Do­ing so usu­ally leads to a fo­cus on poli­cies that are pre­ferred by all mem­bers – such as lower taxes – in­stead of mea­sures that are im­por­tant to the pro­duc­tiv­ity of each mem­ber. Just as mo­nop­o­lies are bad for mar­kets and pol­i­tics, business rep­re­sen­ta­tion in the pri­vate sec­tor would ben­e­fit from more com­pe­ti­tion.

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