Plan or Prosper

Posted by: on Mar 10, 2004 | No Comments

Most people believe that governments must plan. Communist and socialist regimes made planning the centerpiece of their development agenda. India had its five year plans, copied on the basis of central planning by its ally the Soviet Union. Nepal too has its planning commission.

Government it seemed – and still seems to most – is required to plan everything. Government has to plan the savings rate. Government has to plan the growth in population, and family size. Government has to channel investments according to its plan. Government has to plan the food grain output. Government has to plan, plan, and plan – for four decades after independence the government of India planned the production of cement, iron, scooters, cars, fertilizers, electricity, wheat…

Nothing in India could be produced without a license. The government decided that it alone must allocate scarce resources in a planned manner for its people’s benefit.

Government also intervened directly to mandate that no private investment would be permitted in TV, airlines, railways, telephones, power stations … and that government would exclusively run and plan the production of these goods and services.

The private sector and markets were subjugated. Indira Gandhi referred sarcastically to those who advocated free markets as ‘marketwallahs’. In interest of planning India’s progress she nationalized the insurance companies and banks.

How successful were these plans? Indian industry was chained and crippled by its planners. Shortages became endemic. People could – at least some people could – satisfy their urgent requirements by buying in the black market. Smugglers satisfied the requirement of goods demanded from abroad.

Government planned the use of foreign exchange. “Perish the thought of private importing”, the people were told, “we hardly have enough dollars to buy petrol”.

Government of India planned. The economy stagnated. The sub 2% growth rate achieved during that period was dubbed, “the Hindu rate”. There was a problem with Hindus, thought the people of India. Inspite of such extensive government planning, if we still can’t progress, the reason must lie in our nature and our religion that advocates a belief that life is pre-destined and beyond our control.

All this changed in the early 1990’s. Industrial licensing was abolished in one fell swoop by the Narasimha Rao government. What could not be achieved by bureaucrats in over four decades of planning was accomplished by businessmen in a few years when planning became their job.

Shortages of steel, cement, telephones, scooters, and cars vanished. Today, not only do these industries fund their own expansion, they pay huge taxes as well. Foreign exchange reserves have grown from zero to $110 billion and the problem now is how to effectively use all the dollars coming in.

Similar failures of planning became even more apparent in the former Soviet Bloc. Planning by the state doomed the ‘evil’ Russian Empire. It collapsed overnight. The Berlin wall came down and East Germany disappeared in its rubble.

What is required is not planning by the state, but a complete separation between government and the economy. The role of the government must be minimized, that of the market maximized.

It is not the job of bureaucrats to allocate resources, it is for the consumer guided market to do so. Bureaucrats have no incentive to take correct decisions. If they allocate too few resources for the manufacture of cement, so what, they can always shift the blame to greedy hoarders. If government buys wheat at a price leading to overflowing granaries that serve as food stores for rats, so what, the loss gets to be borne by the taxpayers.

If private companies make mistakes – and they often do – it is they who lose out, not the taxpayer. Businessmen, therefore, have all the incentive to rectify mistakes fast or risk bankruptcy. If they produce too little they leave room for a competitor to come in and bridge the gap. If they produce too much, they run into a loss. They will thus continually struggle to get things right. There is no taxpayer and no currency printing presses supporting their mistakes.

Government, if it is serious about economic progress must shut down its planning office, and leave planning and implementation where it belongs – in the hands of businessmen.

The Himalyan Times

Don, you are wrong about taxes

Posted by: on Mar 6, 2004 | No Comments

In response to my December 27, 2004 article advocating reduction in taxes, Don Michaels sent a letter, published in THT, making a case for an increase. Let us analyze each of his arguments.

Don’s first contention is that even if taxes are reduced businessmen will not reduce prices. Don is right that when taxes go down, the prices may not immediately go down, but, in general goods are available at a cheaper rate to consumers in a lower taxed nation than in a high one. Isn’t zero or very low taxes the reason that countries like Singapore and Hong Kong boast of the world’s highest per capita trading volumes as well as living standards which are the envy of those of us in the 3rd world?

Further, high prices due to high taxation reduce demand and thus lower economic activity in the country. If Don, you can afford to buy a Toyota RAV 4 for Rs.20 lakhs, you may not, perhaps, be willing to buy it when taxes result in it being priced at Rs.40 lakhs.

Does Don really believe that if duty rates are brought to zero from say 100% prices will stay the same? How can they? Competition amongst sellers ensures that the consumers get their reductions fast.

Second point made by Don is that, “governments use taxes to build infrastructures; without them nations cannot progress”. I do agree with the later part of the sentence. Nepal does need infrastructure, desperately so. However, if anyone thinks that government taxes result automatically in building infrastructure, that person is dreaming.

A committed socialist like Rajiv Gandhi stated that not more than 15% of what government collects is spent on what the collection is for. 85% or more just disappears in funding the government machinery and in corruption. Why not let the private sector do the job? Why not allow foreign and domestic investment to be utilized for building of roads, airports, communication networks, and power plants?

In India when government regarded telephones as infrastructure people had to wait for years to obtain a connection. And if you did manage to get one it was just that one model made by a government factory and had to be black. When a member of India’s Parliament complained about his instrument not working to the Minister, he was told that only the ‘lucky’ few got telephones as India was poor and there were no funds for ‘luxuries’. Now India’s private companies are not only supplying phone connections by the millions each month, but, are also contributing thousands of crores in taxes to the government.

Don your argument regarding infrastructure doesn’t hold water. Tax money is people’s money, if it is not collected by government it would be available for whatever people desire including infrastructure. To allocate resources is the work of capital markets not government bureaucrats and politicians.

Thirdly, Don says, “As for ‘taking’ money from the rich, who is it that creates the wealth of a nation? Is it a CEO in his plush office or the worker on a construction site, factory, mine or farm?” The implication here clearly is that the worker builds wealth, the businessmen contributes nothing.

This contention displays such ignorance of the wealth generating process that all other arguments of Don pale in comparison. How can anyone even think that a worker without capital, or managerial resources, can produce wealth? Far from it.

If workers could produce wealth on their own then Nepal would be as rich as the US. Does Thapa, a porter, in a remote mountain village at Lukla work harder, or, Smith, an elevator operator, in New York’s Waldorf Astoria Hotel? Thapa in Lukla barely survives, Smith in New York with 1% of the effort owns a car, an apartment, and flies for a holiday to Mexico each year. If Thapa in the Himalayas expended the same effort as does Smith, Thapa would surely starve.

Don, productivity and wealth are the result of capital and capital is destroyed by taxes. Businessmen are required, for they bring in this much needed capital; without them, there would be no site on which to construct, no factory, no mine, and no farm except for subsistence hand to mouth agriculture.

The Himalyan Times