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Thursday, December 21, 2006


This is an important article I was pointed to by David Farrer's Freedom & Whisky. It is a very well researched PDF of 68 pages of a statistically investigation of what causes economic growth.

To give away the ending the answer is ECONOMIC FREEDOM. Perhaps not startlingly unexpected but proven in great detail.

It was written for the South African government shortly after the end of apartheid & has, for reasons which may be those mentioned on page 10, has not been absorbed by them. Since economic growth is far & away the most effective way of improving the total population's lives I would like to think that anybody involved in government would at least make themselves aware of this.


p3 Table of contents

P9 "When published data for all countries has been analyzed the correlation between higher taxes & lower growth (which exists in OECD countries) is not found"

p 10 "During recent years, simple techniques have developed for predicting probable effects of individual measures. It should therefore be easy for all countries to prosper, yet very few do, which suggests that policy makers in most countries:
 Adopt sub-optimal or counter-productive policies unwittingly;
 Do not use readily available techniques to avoid, identify and correct mistakes, or
 Have higher priority anti-growth objectives." (since this report was prepared for the new South African government it seems itself proof of government not making growth a priority - this suggests that what is needed to obtain growth is to put it higher on the political agenda - precisely my intent)

p12 "There is no evidence that foreign "aid" has the potential to "make poverty history". On the contrary, the evidence suggests that aid may be harmful......The aid paradox is that to be a positive incentive, aid would have to go to countries where it is not needed, that is, where governments adopt policies that
result in high growth." (I would point out that aid recipients are self selecting as failed states statistics shown a correlation between aid & failure may be because more aid is the effect rather than the cause)

p13 "What matters, as far as economic growth is concerned, is not the characteristics
of rich countries, but of high-growth countries." (The fact that Ireland & Norway are richer than us doesn't matter. The fact that Ireland is growing far faster than us should be a lesson)

p 25 "Everything gets better with growth....
few people realise how much faster countries become much wealthier if they achieve just slightly higher growth rates" (indeed few people understand in their bones how fast compound growth in anything works)

p40 "Most of the world's top 10 richest or highest growth countries never had

p41 "welfare states under-perform on average, which could also be attributable to the fact that welfare statism tends to coincide with other policies which compromise growth, Sweden being the conspicuous exception, where the market has been characterised by regulatory liberalism and privatisation." (I would also hold up Singapore as having a cradle to grave welfare system, though one which is cost conscious, yet has an obviously high growth rate)

p 43 "The world's experience appears to support the view that economic freedom may be a necessary and sufficient condition for prosperity"

p50 "Firstly, China cannot be thought of as a single economy or even as a single country as far as its economy is concerned. The diversity of economic systems within China, from one province to another, is bigger than the diversity of economic systems internationally. Secondly, almost all its growth (industrialisation, investment, etc) is not only confined to provinces with high scores on the ‘marketisation index’, but to a few special zones. Thirdly, these zones have the freest economies on earth, if not the freest economies the world has ever known."

PP50 & 51 - China's 10% annual growth conceals even greater success. China is not an enormous free economy, it is a range of economies from Guandong province which is nearly as free as Hong Kong (& growing at about 20%) to Quinghai, which economically less free market than the world's least free independent country Burma accordingly China is "close to a controlled experiment in social science". An experiment which goes largely unnoticed here. This proves 2 things.

Firstly that 10% growth is not a maximum beyond which other countries cannot aim but merely an AVERAGE. If China has a province the size of European countries (85 million) growing at 20% then a mere 8% is indeed for wimps (granted internal movement in China means the population is growing far faster than anybody would for the UK as a whole & this probably considerably helps growth). Applying this to the Scottish example it suggests that we can continue falling behind England & continue to see the decline of Scotland's population if we choose to do nothing.

Secondly that the Chinese "bubble" is not going to burst, indeed because the faster growing provinces are becoming an ever larger proportion of the economy we should expect their 10% growth, which represents the average, to increase.

PP 54 & 55 - Countries with high taxation levels are not automatically going to have lower growth rates than those with high taxation. This comes as a surprise to free marketists and somewhat less so to me, who at one stage was a great supporter of the state capitalism which really did produce high growth in the early days of the USSR. The reason seems to be that if government spends the money as wisely as the free market it will achieve at least as good results. To spend effectively government should (!) build infrastructure especially transport, (2) provide services rather than regulate (ie the NHS rather than smoking police) (3) do things that don't merely duplicate what the market does (don't run the railways) (4) increase efficiency by outsourcing & privatisation. To extend my point about the early USSR I believe that where government is bad is in the long term - because it doesn't have the spur of bankruptcy an efficient government enterprise will, over time, increase inefficiencies. I believe that is what happened to NASA & the USSR, both government organisations which once performed spectacularly & over time became mired in bureaucracies. By comparison a Scottish executive which insists on spending 70% of its transport budget on outdated railways & prefers windmills to nuclear has managed to omit the first stage of the process.

P58 - Most studies find that less regulated countries out perform more regulated ones (unsurprisng) and that regulations cost the people 20 times more than they cost the government (surprising).

p60 - "The relative size of education budgets does not significantly influence growth"

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