Some
economies are vibrant, growing and have low unemployment. Others are
stagnant and have high unemployment. The key difference is whether
entrepreneurial behavior is flourishing.
Since it is so critical to healthy economies,
several governments and academic institutions have studied "business
formation," which is what academics call entrepreneurial behavior,
to determine what factors help or hinder it.
Although several reasons are cited, the primary
determinants seem to be: the size and power of government, taxes and
culture and attitudes. I will address the second and third topics
in later articles.
The empirical evidence on the first point is
clear. If governments are large and bureaucratic, entrepreneurship
is weak. If governments are small and lean, entrepreneurship tends
to flourish.
In a recent study, the World Bank reported that
there is a strong negative correlation between standard of living
and cost of registering a business. In the poorest countries, it took
more than 120 percent of a year's salary to pay all the registration
and licensing costs to start a business; in the wealthiest countries,
it took less than 10 percent.
In the poorest countries, it took more than 16
procedures to register a business; in the wealthiest countries it
took less than five. Not coincidentally, the poor countries saw very
little business formation.
The regulatory environment is also critical.
Europe has unemployment rates that are nearly double those in the
United States. The most frequently cited reason is restrictive work
rules.
The paradox is that the rules put in to help
workers actually end up hurting them.
For example, it can be extraordinarily difficult
and expensive to lay off or fire workers in many European countries.
In addition, there are many rules limiting overtime hours, requiring
minimum pay, preventing rapid plant closures and specifying
how union negotiations can be conducted. As a result,
businesses are building relatively few new plants in Europe and are
often investing in other countries, including the United States, especially
for startup and new technology operations with high risk. |
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The result is that countries
with less restrictive rules get more investment, business formation
and jobs. Workers are forced to change jobs more often, but lower
unemployment makes that easier. Of course, for new technology, it
is also important to have advanced research universities and other
infrastructure. But companies that can't lay workers off easily will
be afraid of hiring them in the first place. The result is higher
unemployment.
Even worse than the cost of bureaucracy is the
unfortunate fact that large and powerful governments have often led
to corruption. In many emerging markets, entrepreneurs are forced
to pay bribes — often disguised as special licensing fees, oversight
fees or registration fees — that wind up in the pockets of government
officials. If the entrepreneurs refuse, they don't get the necessary
licenses or registrations; the desperately needed businesses and jobs
they create never get started.
Closely related to the negative impact of government
rules and regulations is what researchers call the "brain drain."
Because bright entrepreneurs cannot start businesses easily in their
home countries, they come to the United States or other Western nations
with greater freedoms and develop their new technologies here rather
than in their home countries where the jobs are desperately needed.
What is true for countries is also true for states
or cities. Next time a political issue arises that forces additional
licensing requirements for business, raises tax revenues from "rich
businesses" or is supposed to help workers by restricting what employers
can do, be careful about the law of unintended consequences. What
is intended to help may actually be hurting.
The brain drain of entrepreneurial talent is
just as severe for cities as it is for countries. |
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