The productivity of trust between state and private firms

Ricardo Hausmann has a nice article on the topic. There is always this uneasy relationship between big businesses and government.

Both believe that they are distant from each other which is just that – a belief:

The Nobel laureate economist Paul Krugman once quipped that “Canada is essentially closer to the United States than it is to itself.” After all, most of its citizens live in a narrow band along the more than 3,000-mile-long border. Most Canadians live closer to more Americans than they do to other Canadians.
The same can be said of corporations and governments. Most firms are closer to the government than they are to other firms: they interact with government rules and agencies more than they do with the rest of the business community. The quality of that interaction and its evolution over time is probably the most fundamental determinant of a country’s potential for growth and prosperity.

But this is not the Weltanschauung – the worldview – that permeates private-sector discourse, especially the views expressed by most chambers of trade and industry and business associations around the world. Business organizations often hew to Ronald Reagan’s dictum: “Government is not the solution to our problems; government is the problem.”

It is a great sound bite: short, recursive, and somewhat poetic. Unfortunately, it is also dangerously misleading. After all, even if government were the problem, then changing what it does must be part of the solution.

The truth is that markets cannot exist without governments, and vice versa. Governments are essential to the establishment of security, justice, property rights, and contract enforcement, all of which are essential to a market economy.

Governments must also organize the provision of infrastructure for transportation, communication, energy, water, and waste disposal. They run and regulate health-care systems and primary, secondary, tertiary, and vocational education. They create the rules and provide the certifications that allow firms to assure their customers, workers, and neighbors that what they do is safe. They protect creditors and minority shareholders from miscreant managers (and managers from impulsive creditors).

 

What is needed is trust between the two. The kind of trust which pushes productivity and not profitability:

Outcomes would be very different if the focus of the relationship were productivity rather than profitability. Productivity improvements, by lowering costs, allow firms to pay their workers and suppliers better, reduce prices for consumers, pay more in taxes, and still make more money for their shareholders. A focus on productivity is win-win-win.

Governments can do many things, in a variety of areas, to raise productivity. Fresh produce requires a cold-storage logistic system, a green lane at customs, certification of good agricultural practices, and sanitary permits. Tourism depends on sensible visa requirements, convenient airports, road signs, hotel construction permits, and the preservation of cultural sites and coastlines. Manufacturing requires dedicated urban space that is adequately connected to power, water, transport, logistics, security, and a diverse labor force.

All of these productivity-boosting inputs require institutions that teach and extend industry-relevant knowledge and skills. None of them appears in the World Bank’s Doing Business indicators or the World Economic Forum’s Global Competitiveness Index. And yet, without these public inputs, the industries that depend on them cannot succeed.

That is precisely what happens in the absence of a sound and legitimate basis for cooperation between the government and the private sector. The result is inadequate provision of public goods that raise productivity and make everyone better off.

To create such a basis for cooperation, many countries need a new compact between the government and the private sector. This will not be possible if business groups insist on putting taxes at the center of the discussion. Instead, they should focus on measures that raise productivity.

Nice bit..

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