Wednesday, September 26, 2007

The Business Climate and Economic Growth


The World Bank recently issued its annual report on the global business climate, Doing Business 2008, ranking countries on the ease of doing business. Eight of the top ten are Western democracies, with Singapore and Hong Kong rounding out the list. Twenty-six of the bottom 30, ranked 149 through 178 are in Sub-Saharan Africa.

The ease of doing business should be a factor in economic growth. However, the relationship is not so straightforward. While the top ten are performing much better than the bottom thirty, none in the top ten lead the world in growth. The two fastest-growing economies are China and India, which received rankings of 83 and 130 respectively, followed closely by Vietnam at 91. While India and Vietnam’s high growth is a relatively recent phenomenon, China has averaged 9-10 percent real economic growth for the past twenty-five years. China moved up ten spots this year, from 93 to 83. Still, to be ranked so low with such spectacular growth calls into question the World Bank’s definition and measurement of the business climate, or its relevance to growth. Countries ranked ahead of China, including Jamaica, Kenya, Kazakhstan, El Salvador, Belize, Peru, Romania, Bulgaria, and Namibia, have not come close to achieving China’s sustained growth over the past twenty-five years.

Tobacco Politics

Study after study has confirmed the danger to public health from smoking. The American Heart Association reports that 440,000, the largest number, of the 2.4 million annual deaths in the United States are due to cigarette smoking. The Surgeon General has called it the leading cause of disease and preventable death in the United States. In light of these facts, it seems hard to understand that any tobacco is still grown in the United States.

Or so you would think. The Democratic Party is trying to push through Congress an expansion of the State Children’s Health Insurance Program. To help pay for the expansion, the bill includes raising the federal cigarette tax by 61¢ a pack from its current rate of 39¢ to $1, in addition to state taxes that range from a low of 17¢ in Missouri to a high of $2.57 in New Jersey. Projected revenue from the federal tax hike comes to $36 billion. Although the House of Representatives voted 265-159 to approve the bill, eight Democrats opposed the bill, either because they were from tobacco-growing districts or because they objected to the tax increase on cigarettes.

More than four years after the United States brought down the repressive Taliban government in Afghanistan, it has made no progress in reducing the cultivation of the poppy plant. The extract from the seed pods in poppies are used to produce opium, which is converted into heroin, morphine, and other deadly drugs. Afghanistan has increased its production to the point where it supplies 93 percent of the world’s output.

If members of Congress vote to protect tobacco growers in the United States, it borders on hypocrisy to complain about the inability to curtail poppy cultivation in Afghanistan.

American Manufacturing

The National Association of Manufacturers (NAM) took out a four-page ad in the September 26, 2007, edition of the Wall Street Journal, pointing to the great success of American manufacturing. However, it noted that America’s ability to compete with foreign manufacturers required several immediate steps to maintain its world leadership.

The list includes modernizing road, rail, and barge infrastructure to reduce transportation costs, developing more low-cost sources of energy (especially natural gas), improving American education in science and math and graduating more scientists and engineers to compete with China, India, and Russia, pursuing fair trade agreements, ending currency manipulation (meaning China should revalue its currency), reducing the corporate tax rate, and ending double taxation. The likelihood of achieving any these measures in the near future is slim. If the NAM is correct, American manufacturing faces a bumpy road ahead.

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