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Governments Role in Prosperity

"Visit virtually any poor country and you’ll quickly see that it has considerable entrepreneurial energy, as people trade in stalls and on street corners. Why doesn’t such activity translate into vigorous economic growth? Because government-made barriers, such as obstacles to setting up a legal business, onerous taxation, [and] the lack of basic property rights … stand in the way. The proper role of government is to create a conducive environment in which commerce can take place and then to stand aside. Prosperity is certain to follow.” 

– Steve Forbes in the Foreword to Popular Economics (by J. Tamny) Regnery Publishing, 2015. 


While I agree with Forbes’ nod to the entrepreneurial spirit and energy of societies in poor countries, I find fault with his remedy for stagnant economic growth. In contrast, Jones and Romer's (2010) framework for catch-up economic growth among developing countries is provides a more persuasive argument for prosperity through government regulation.


Forbes’ quote reverberates conservative open market-based economic thought in the context of economic development. His reasoning for the persistent lack of economic growth among poor countries is consistent with Adam Smith’s invisible hand and the power of the free market. For example, Forbes asserts that government made barriers such as opposition to legal business, onerous taxation, and lack of basic property rights stymie economic development. However, while Forbes does highlight the importance of ideas, his subscription to conservative thought does not lend credit to the importance and necessity of quality government in achieving economic growth through the spread of ideas.

 

The Economics of Development (Perkins et al.) emphasizes the importance of human capital investment, economic and political stability, open trade, and a friendly business climate for economic growth. Additionally, it is widely known that technological change is a key ingredient in economic growth, however unlocking the ingredients and environment in which technological innovation and change can manifest and spread is still up for debate. Jones and Romer (2010) discuss the importance of ideas and institutions in growth theory, suggesting that they matter far more than originally predicted by the neoclassical model, providing increasing returns to scale implied by nonrivalry ideas. Part of this discussion counters classic concepts in the neoclassic model that may lend too much import to the efficient allocation of resources and innovation within the free market. Instead, Jones and Romer (2010) call for a model that incorporates other components of growth and captures the interaction of ideas, institutions, population, and human capital to fully understand how the ingredients for economic growth. De Soto (2001) provides an interesting example of this in the context of former communist countries, explaining that the problem is “not the lack of entrepreneurship” or the cultivation of ideas for innovation, but “easy access to property mechanisms that fix the economic potential of assets for…greater value in the expanded market.” Perhaps this is what Forbes meant in his assessment of property rights. However, I see this as an institutional limitation due to lack of institutional integration, laws, and regulations that allow for the potential of asset’s capital to be fully realized (de Soto 2001).

 

Finally, Forbes’ examples of government barriers are the very laws and regulations that allow government to create a favorable business environment for commerce to take place. Without regulation of business activity and a tax regime to fund necessary expenditures, the environment for commerce would be severely skewed towards capitalists and wealthy business owners, allowing further exploitation and increase persistent inequalities in poorer countries.

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