The story of GM teaches us some salutary lessons about the potential conflicts between corporate and national interests – what is good for a company, however important it may be, may not be good for the country. Moreover, it highlights the conflicts between different stakeholders that make up the firm – what is good for some stakeholders of a company, such as managers and short-term shareholders, may not be good for others, such as workers and suppliers. Ultimately, it also tells us that what is good for a company in the short run may not even be good for it in the long run – what is good for GM today may not be good for GM tomorrow.
Now, some readers, even ones who were already persuaded by this argument, may still wonder whether the US is just an exception that proves the rule. Under-regulation may be a problem for the US, but in most other countries, isn’t the problem over-regulation?
In the early 1990s, the Hong Kong-based English-language business magazine, Far Eastern Economic Review, ran a special issue on South Korea. In one article the magazine expressed puzzlement at the fact that, even though it needed up to 299 permits from up to 199 agencies to open a factory in the country, South Korea had grown at over 6 per cent in per capita terms for the previous three decades. How was this possible? How can a country with such an oppressive regulatory regime grow so fast?
Before trying to make sense of this puzzle, I must point out that it was not just Korea before the 1990s in which seemingly onerous regulations coexisted with a vibrant economy. The situation was similar in Japan and Taiwan throughout their ‘miracle’ years between the 1950s and the 1980s. The Chinese economy has been heavily regulated in a similar manner during the last three decades of rapid growth. In contrast, over the last three decades, many developing countries in Latin America and Sub-Saharan Africa have de-regulated their economies in the hope that it would stimulate business activities and accelerate their growth. However, puzzlingly, since the 1980s, they have grown far more slowly than in the 1960s and 70s, when they were supposedly held back by excessive regulations (see Things 7 and 11).
The first explanation for the puzzle is that, strange as it may seem to most people without business experience, businesspeople will get 299 permits (with some circumvented along the way with bribes, if they can get away with it), if there is enough money to be made at the end of the process. So, in a country that is growing fast and where good business opportunities are cropping up all the time, even the hassle of acquiring 299 permits would not deter business people from opening a new line of business. In contrast, if there is little money to be made at the end of the process, even twenty-nine permits may look too onerous.
More importantly, the reason why some countries that have heavily regulated business have done economically well is that many regulations are actually good for business.
Sometimes regulations help business by limiting the ability of firms to engage in activities that bring them greater profits in the short run but ultimately destroy the common resource that all business firms need. For example, regulating the intensity of fish farming may reduce the profits of individual fish farms but help the fish-farming industry as a whole by preserving the quality of water that all the fish farms have to use. For another example, it may be in the interest of individual firms to employ children and lower their wage bills. However, a widespread use of child labour will lower the quality of the labour force in the longer run by stunting the physical and mental development of children. In such a case, child labour regulation can actually benefit the entire business sector in the long run. For yet another example, individual banks may benefit from lending more aggressively. But when all of them do the same, they may all suffer in the end, as such lending behaviours may increase the chance of systemic collapse, as we have seen in the 2008 global financial crisis. Restricting what banks can do, then, may actually help them in the long run, even if it does not immediately benefit them (see Thing 22).
It is not just that regulation can help firms by preventing them from undermining the basis of their long-term sustainability. Sometimes, regulations can help businesses by forcing firms to do things that may not be in their individual interests but raise their collective productivity in the long run. For example, firms often do not invest enough in training their workers. This is because they are worried about their workers being poached by other firms ‘free-riding’ on their training efforts. In such a situation, the government imposing a requirement for worker training on all firms could actually raise the quality of the labour force, thereby ultimately benefiting all firms. For another example, in a developing country that needs to import technologies from abroad, the government can help business achieve higher productivity in the long run by banning the importation of overly obsolete foreign technologies that may enable their importers to undermine competitors in the short run but will lock them into dead-end technologies.
Karl Marx described the government restriction of business freedom for the sake of the collective interest of the capitalist class as it acting as ‘the executive committee of the bourgeoisie’. But you don’t need to be a Marxist to see that regulations restricting freedom for individual firms may promote the collective interest of the entire business sector, not to speak of the nation as a whole. In other words, there are many regulations that are pro- rather than anti-business. Many regulations help preserve the common-pool resources that all firms share, while others help business by making firms do things that raise their collective productivity in the long run. Only when we recognize this will we be able to see that what matters is not the absolute amount of regulation, but the aims and contents of those regulations.
Thing 19
Despite the fall of communism,
we are still living in planned economies
The limits of economic planning have been resoundingly demonstrated by the fall of communism. In complex modern economies, planning is neither possible nor desirable. Only decentralized decisions through the market mechanism, based on individuals and firms being always on the lookout for a profitable opportunity, are capable of sustaining a complex modern economy. We should do away with the delusion that we can plan anything in this complex and ever-changing world. The less planning there is, the better.
Capitalist economies are in large part planned. Governments in capitalist economies practise planning too, albeit on a more limited basis than under communist central planning. All of them finance a significant share of investment in R&D and infrastructure. Most of them plan a significant chunk of the economy through the planning of the activities of state-owned enterprises. Many capitalist governments plan the future shape of individual industrial sectors through sectoral industrial policy or even that of the national economy through indicative planning. More importantly, modern capitalist economies are made up of large, hierarchical corporations that plan their activities in great detail, even across national borders. Therefore, the question is not whether you plan or not. It is about planning the right things at the right levels.
In the 1970s, many Western diplomats called the Soviet Union ‘Upper Volta with rockets’. What an insult – that is, to Upper Volta (renamed Burkina Faso in 1984), which was being branded the quintessential poor country, when it wasn’t even near the bottom of the world poverty league. The nickname, however, succinctly summarized what was wrong with the Soviet economy.