How Inefficiency Can Promote Growth

Inefficiency and Growth – at - the best of the week's international financial media.

It's only natural for human beings to promote their own interests. In the case of political establishments this takes the form of passing more laws and regulating more, to give voters the impression of useful activity, create employment for themselves and their mates, and enhance their power. Boosting economic growth to raise living standards has a low priority compared to such self-serving objectives.

Could this be why inefficiency, or failure to implement laws and regulations effectively, can be a positive factor in society? Some examples:

- Corruption's not always a bad thing. In developing countries it's a usual way of oiling the wheels, circumventing the red tape, removing bureaucratic obstacles to entrepreneurial activity.

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Of course, it would be far better were it not necessary. But in practice, it often brings about higher growth than would otherwise be experienced. (A friend comments that it depends whether the corruptors reinvest their ill-gotten gains in businesses, as is usual in Asia, or simply just export them to Swiss banks, as is commonplace in Africa).

- Britain's immigration controls, as is well known, are ineffective. The latest internal Government estimate, leaked to a newspaper, is that there are probably half-a-million illegal immigrants living in the country.

Undoubtedly the flood of immigrants is generating some social problems. However, could the abundance of immigrants, legal and illegal, who now do most of the dirty work in the fields and on construction sites, as well as providing (amazingly) almost half the nurses working in the National Health Service, be one reason why the UK economy has been doing so well compared to its European neighbours?

- Since the political transition a decade ago, South Africa's economy has done moderately well despite foolish labour laws, declining competence in public administration, and the obsessive focus on redistribution rather than growth.

Could it be that the spread of corruption, and with it the collapse of effective control over imports, has both intensified competition (making for greater efficiency) and opened up new opportunities for unscrupulous, hard-driving entrepreneurs?

Is inefficiency in applying laws and regulations, both the bad ones inherited from apartheid days and the new ones introduced by the liberators, one reason why economic growth has held up well (and, because of the vigour of the underground economy, may be rather better than the official figures show)?

Inefficiency as a growth stimulus: That's a new idea for the academics to consider.

By Martin Spring in On Target, a private newsletter on global strategy