[Copyright, 2017, Mike P. McKeever, San Francisco, CA., All rights reserved. Permission is hereby granted for reproduction in whole or part with attribution in any electronic medium. For print reproduction, contact the author at firstname.lastname@example.org]
This section of the MIEPA website is for students or professionals who wish to prepare and submit an analysis of their home country's economic policies for publication on the website. It discusses in detail the requirements, underlying theories and procedures for creating such a study.
If you would like to learn more about applying to MIEPA to publish a country analysis on a strictly volunteer, unpaid basis, please scroll down to the section WRITING ECONOMIC POLICY STUDIES.
The policy analysis criteria are designed to create jobs in any society. The attempt is made to identify and then judge the effectiveness of those economic policies which affect job creation in any country regardless of the political system in place.Recent experience in the United States of America has shown that job creation without accompanying income increases will not suffice to enlarge Consumer demand. Additional policies are required to ensure that wages increase along with job creation. The recent [2008 through 2017] increases in job creation have NOT been accompanied with the normal historic increases in wages. There are several specific economic policies which can be installed which will increase wages and thus increase effective demand. They are listed and discussed in my book ' Occupy Wall Street Plan 12: A Proposal for Twelve Specific Governmental Actions to Correct Some Economic Imbalances in the United States of America, Kindle Edition' 2015, Amazon Kindle. Here is the link to that book: https://www.amazon.com/Occupy-Wall-Street-Plan-Governmental-ebook/dp/B00UK97C84/ref=asap_bc?ie=UTF8
As seen below, it is MIEPA's conclusion that market forces are required to create jobs - the 20th Century Soviet experiment in central planning has disproved the concept of a centrally planned economy creating jobs for all the population without the use of market interactions.
As a background and introduction, this section will discuss the jobs theory of growth and then compare it to traditional theories of economic growth.
Economic growth has become an interesting problem because of the exponential population growth of the last two hundred years. The world supported less than a billion people for many thousands of years until about 1800. Since then the population has grown to about 6 billion as of 2000. The problem of how to clothe and feed the extra five billion people is one of the major problems of our time. At the least, the world's economies must create millions of new jobs quickly.
In the economic circular flow of money and goods, businesses sell goods to consumers and hire workers to produce and sell those goods. The workers take their wages and buy products and services from businesses.
The classical economist's way of looking at the flow was to say that 'Supply creates Demand'. In other words, business must hire workers to create products and those workers in turn use their incomes to create demand for businesses by spending their wages. Classical economics then looks at businesses as the foundation of economic activity for their efforts to create products by hiring workers. While creating a product or service the business pays workers wages which then creates an income for consumers. Classical economics focuses on business product creation and assumes the demand will follow.
The jobs theory turns that around to make this statement: 'Demand Creates Supply'. In other words, if consumers have an income, businesses will be formed to supply products to consumers. Then, the focus is on the consumer's income - if consumers have an income, business will cater to that income by creating products for consumers to buy.
Economic growth then becomes the creation of new businesses and jobs; and, it is measured by the number of jobs created. One cannot just measure the number of businesses created since one new business may create hundreds of jobs while another new business creates only one job.
When more jobs are created, then the economy grows. It is measurable - just count the number of new jobs created and subtract the number of jobs lost. If the number is positive, then there is economic growth. If the number is negative, then the economy has shrunk.
For example, the number of people working in the USA grew from 64,630,000 in 1959 to 145,926,000 in December of 2006, according to the 2007 Economic Report of the President [http://www.gpoaccess.gov/eop/tables07.html]. This is a growth of two and one quarter times over a 47 year period.
During that same period, the population grew from 177,830,000 in 1959 to 299,801,000 in 2006. This was a growth of about 68%.
Not only did the absolute number of jobs grow by 125% during that period, the number of jobs grew almost twice as fast as the population.
The number of jobs per capita is derived by dividing the number of jobs by the population. It grew from 0.36 in 1959 to 0.49 in 2006. In other words, one working person supported nearly two non-working people in 1959, but one working person supported only one non-working person in 2006. Economic growth is measured by an increase in per capita jobs.
In most economies, most jobs are created by small entrepreneurial businesses. There are four conditions required for any businesses to be formed. When present, these pre-conditions allow for job creation; when absent, job creation is almost impossible.
Business owners largely come from a middle class, when that class is defined as a class of people who have the extra time and income to conceive of a business opportunity and save, borrow or collect investors in order to start a business and hire employees.
A business is a venture in which property is bought and sold. If property cannot be protected or defined a business cannot survive. The system which creates and protects property is a legal system installed and maintained by a government. Job creation requires a complex legal system which describes, defends and resolves disputes about personal, real and intellectual property.
Personal property is merchandise which is not permanently attached to the ground. The items for sale in a retail store are personal property. The legal system which creates and transfers ownership of personal property is governed by the Uniform Commercial Code [UCC] in the United States. This is a set of definitions of such things as a contract, invoice, bill of lading, receipt and so on which are accepted by all states, counties and cities in the USA. The UCC is readily available on the Internet and is managed by Cornell University Law School; it is available at http://www.law.cornell.edu/ucc/ucc.table.html.
Businesses require predictable rules about the acquisition, possession and transfer of personal property since most businesses buy and sell personal property such as those incorporated in the UCC. Businesses also require an effective police force to protect their property against theft. If the business owner cannot predict whether or not a robber will steal his property, he will take his investment to a safer country. Then, there will be no business created and no jobs offered.
A society which wishes to see job creation will incorporate standard rules of creating, owning and transferring personal property.
Real property, or real estate, includes land, buildings and any items permanently attached to the land or building. For example, the electrical wires enclosed in the walls of a house are real property since they cannot be removed without damaging the house. But, a mirror hung on the wall with nails is personal property because it is easily movable without damaging the wall.
Much of the value in real property derives from the ability to measure and exactly describe where is the vacant land or land which underlies buildings. This ability to locate land precisely enables banks in distant cities to loan money against the value of the land and buildings. It also makes possible the establishment of the proper owner of that land so that a person's claims of ownership can be defended in court.
Land is described by surveys documented in public records and claims of ownership are recorded in public records identified by each individual parcel. Creating the value in real property requires a complex set of public records, laws, court systems to settle disputes and a police force to secure ownership from criminals.
Intellectual property is the unique product of an individual who designs a new device, writes a new article or book or writes a new song, musical composition or computer program. The value in intellectual property derives from two things; first, a system of registering claims of uniqueness maintained by a government entity and, second, a system of laws which allows the creator of the new item to sue people for damages who copy his unique works without permission.
In countries where intellectual property is not protected by the government, pirates routinely copy intellectual property without permission and pocket the proceeds.
Of course, in less developed societies some of the legal systems described above may be non-existent or very simple while still allowing entrepreneurs the incentives to hire employees. Complex laws may be replaced by societal customs and traditional practices. But, as the economy grows, the legal system will grow with it and expand the job creating opportunities.
Job creation requires that businesses grow so they can hire more people. In turn, the energy the business owner invests into growing his business requires that he be free from simple, repetitive tasks - that's the only way he can explore new ideas and create new projects.
One of the most frustrating tasks for a business owner in an economy where there is no monetary exchange is the constant search for barter possibilities or currency exchange so the businessman can convert the goods he receives in exchange for his goods into products he needs. For example, say a business person makes plows from steel and sells them to farmers. With no monetary exchange, he will trade his plows for corn and then try to find someone with steel who will take his corn. Or, say a vendor sells supplies in a market where many currencies are circulated but buys products where only US dollars are accepted; he must spend a lot of time changing money.
A market is a place where buyers and sellers meet and exchange goods and money. It can be a physical place like a swap meet or open market, a series of locations like stores in a shopping center or a series of online web sites.
Markets can exist where property is either privately owned or publicly owned. Markets can be more or less regulated depending on the political philosophy of the country. As mentioned above, the Soviet experiment in central planning and non-market exchange in the 20th Century appears to prove that markets are required for economic growth.
The policies discussed in this site are designed to create the most possible jobs in any country. Since businesses create most jobs, improving the listed policies toward a higher score will promote and support business activity.
However, the profit goals of business can conflict with the overall goals of society in some circumstances. Additionally, evidence shows that poorly regulated markets tend to create large income and wealth disparities; such disparities can interfere with job creation and social justice when taken to the extreme. Great inequalities can create powerful pressure groups which can manipulate public policy toward private interests and which are more interested in personal profits than the welfare of society. Consequently, well managed countries ameliorate income and wealth disparities and closely monitor business activity and regulate that activity when profit seeking behavior conflicts with society's goals.
In the past, economists have examined growth in an attempt to create a better life for more people. While MIEPA believes the job theory of growth the most applicable to the population growth problem identified above, it is worthwhile to examine historical growth theories.
Economists define economic growth as an increase in real GDP per capita. In other words, they take the entire money value of goods and services produced in a country in a year, reduce the value to account for inflation and then divide by the number of people in the country that year. That gives a measure of the amount of actual goods and services per person for that year. If the same measure next year shows a higher number, then there has been economic growth.
Using this measuring technique, the United States has shown more than one hundred years of positive economic growth - between 1895 and 1998 the real GDP per person in the USA grew by 2% per year. Although there are many explanations of this phenomenon, a few reasons include: educated population, business friendly government policies, consistent legal structure in a large market, and, a large middle class of people with enough income to think about investments.
Historically, there are several economic theories of how to create growth as measured by an increase in real GDP per capita.
1. CLASSICAL GROWTH THEORY
Writing in the 1700's, Adam Smith proposed the first theory of economic growth. His idea was that economic changes allowed for an increase in population growth, and the increase in population growth was economic growth. He reasoned this way: market forces create equilibrium of wages so that any extra children born to a family will die from starvation or disease before entering the labor market. This die-off keeps wages at a level which just supports the number of workers demanded by businesses. If the demand for workers increases so that businesses want to hire more workers at every wage, then workers will bid up their wages beyond subsistence level and more children will be able to live long enough to enter the labor force.
Once the new workers enter the labor force, the competition for jobs will drive wages down to the level needed by businesses at a subsistence wage. But, economic growth will take place since the number of workers supported by business will be larger.
2. NEO-CLASSICAL GROWTH THEORY
Writing in the 1950's Robert Solow proposed that economic growth is caused by a change in the relation of capital, or money, to labor hours worked. Basically, a new technology is invented which enables a worker to produce more output per hour worked. Business naturally invests in this new technology thereby raising the amount of capital used per hour of work. Economic growth is created because the additional capital has increased the worker's output per hour. This extra output becomes an increase in real GDP per person, or economic growth.
By following this theory, economic policies which encourage the accumulation of capital and the investment of capital into business will create economic growth.
3. NEW GROWTH THEORY
In the late 1980's a different theory of growth was introduced. This theory said that intellectual innovations, like personal computers and effective software programs, raise the productivity of all workers and raise the return on all capital invested in businesses. This higher return rate calls forth additional investment in businesses since now business investment is seen as more attractive than before.
Then this additional investment will create another intellectual innovation which will raise the productivity of all workers even further. Then additional capital will be invested and the cycle begins all over.
Whether these cycles would continue indefinitely was answered in the dot bomb recession of the late 1990's when businesses based on this growth theory mostly died.
The purpose of this section is to describe how students and professionals under MIEPA's direction perform economic policy analysis and to invite other economic students or graduates to perform a similar analysis for ultimate publication on the MIEPA website.
Analysis of each of the 34 policies for any country study consists of two procedures. First the student writes a draft analysis of the first five polices on the assignment and submits them to MIEPA for review. The draft is written after reading the background and goals of that policy shown below in this section. MIEPA editors then provide the student/analyst with comments on errors and suggestions for improvement.
Second, the student analyst corrects the errors or incorporates the suggestions MIEPA provides. Then, the student submits the completed policy discussion to MIEPA for publication. Once the second draft of each policy is submitted, the analyst has completed that policy and then proceeds to write drafts of additional polices.
Normally the student completes the first drafts of five policies per week. MIEPA returns those five policies to the student for correction the following week; then, and the corrections are submitted to MIEPA in the third week. Obviously, during the process the student is analyzing an average of ten policies at any time.
The ideal policy analyst is a student or professional who has completed at least the first year of a university level economics class with a grade of B or better. The analyst will have lived in his or her home country until the age of 16 years at minimum. H/she will be fluent in the home country language as well as English. The analyst will be computer, Microsoft Windows and internet literate and will have easy access to email and web browsing. S/he will be able to budget four hours per week to the project for a 15 week period.
MIEPA offers such students or professionals the opportunity to publish work. But, the work must be completed according to MIEPA procedures and guidelines in order to qualify for publication. Any deviation from approved procedures will eliminate the opportunity for publication. No financial reward is offered.
Any published work will remain on the website until another analysis of the same country is published. If two or more analysts write on the same country at the same time, both studies will be published and remain until another analysis is published.
MIEPA will cooperate with University professors in working with students enrolled in economics classes. This work has been successfully integrated into a standard one semester macro or micro economics class as a term paper assignment. Students completing the project were assured of the highest grade available on the project portion of their grade. Students who failed to complete the project received a zero credit for that portion of their grade.
If you or a student would like to participate in this project, please follow the instructions at the end of this discussion. Admission to the program is at the sole discretion of MIEPA. Admission is limited to five analysts in any calendar quarter.
Each policy should have at least two sources for material. One of the sources MIEPA allows is the student's personal experiences and observations. This requires that the student be a native of the country about which he writes and that he had lived in the country under analysis until at least the age of 16 years. The reason MIEPA allows personal experience as a source is that many of the policies included in MIEPA analyses are not regularly discussed in economic literature. Also, MIEPA is most interested in the real situation that people face every day as opposed to government propaganda or wishes. MIEPA discourages excessive reliance on personal experience as a sole source and requires that there is at least one other source as back up.
Unpublished sources are allowed. That is, the student analyst is permitted to use unpublished web sites and/or personal interviews as sources. These sources may be in a native language and do not have to be in English although the published analysis will be published in English.
Obviously, the quality of the analysis is determined by the quality of the sources and MIEPA strongly encourages good references.
Method of Analysis
The student is asked to imagine that he wishes to open a new business in the capital city of his home country. Then he is asked to judge whether each individual policy would help or encourage him to open that business, would hinder him in opening that business or would have no effect on his decision to open a business.
The analyst assigns a numerical score to each policy as to that policies effect on his hypothetical business opening decision. The numerical scores are based on this scale:
5.0 - Strongly encourages opening a business
4.0 - Moderately encourages opening a business
3.0 - Neutral, has no effect on the decision
2.0 - Moderately discourages opening a business
1.0 - Strongly discourages opening a business.
After a score is assigned, the analyst writes a short discussion of the effects of that policy in the country under analysis. The purpose of the discussion is to support the numerical score assigned to that policy. After all, most readers will have limited knowledge of the country; a discussion that contradicts the score will confuse the reader.
Order of Analysis
Polices are analyzed in reverse order - that is policy number 34 is analyzed first while policy number 1 is analyzed last. The policies are numbered according to their importance in creating jobs. Policy 1 is more important in creating jobs than is policy 34. It takes a little time for a student to become familiar with the processes and concepts of this work and the analyst student gains confidence by beginning with less important policies.
There are six groups of policies:
A. Critical Internal Policies - these are policies which are critically important to job creation and which affect internal conditions primarily.
B. Critical External Policies - these are policies which are critical to job creation and which affect relations with other countries.
C. Important Internal Policies - these are internal policies which are important to job creation but less critical than Group A policies
D. Important External Policies - these are external polices which are important to job creation but less critical than Group B policies
E. Beneficial Internal Policies - these are internal policies which are helpful but not necessary to job creation.
F. Beneficial External Policies - these are external policies which are helpful but not necessary to job creation.
This section discusses each policy and how the analyst shall proceed to write an analysis. As per above, this section presents policies in reverse order with the analyst writing Policy 34 first and Policy 1 last.
GROUP 6: BENEFICIAL EXTERNAL POLICIES
35. Protection of domestic enterprises from government mandated costs
When any country imposes costs on its domestic enterprises that are not uniformly imposed by other countries, such as environmental taxes or worker safety regulations, those companies will be at a cost disadvantage in the home market. Countries should protect domestic companies from government imposed cost disadvantages. Countries which impose tariffs to neutralize these costs receive high scores.
For example, suppose the entrepreneur plans to start a woodworking business in California. That business will probably be required to install an extensive dust removing system in the plant because dust in confined spaces can explode and injure workers. If the business were located in Mexico, perhaps the business would not need to install such dust removal systems. This means that the California business is at a disadvantage when compared to the Mexican business - it is cheaper to operate in Mexico.
In this case the California business would receive a lower score such as a 2 or a 1 while the Mexico business would receive a score of 4 or 5.
34. International security agreements
Potential entrepreneurs don't want to start or expand businesses when their personal safety is at risk. Mutual military aid treaties and other agreements that increase a country's ability to counter an armed threat help a country's security. Countries which enter such treaties to protect their domestic security from attack receive high marks when the treaties are effective.
The analyst judges whether the country has mutual defense treaties with neighboring countries so that any armed threat to the home country will be met with armed counter measures from several countries. If such agreements exist and are seen as strong, then the country should receive a score of a 4 or 5 on this policy.
For countries such as the USA and China, the home military is so strong that treaties are not necessary; these countries also receive a high score on this policy.
GROUP 5: BENEFICIAL INTERNAL POLICIES
33. Government enterprises
Government owned businesses which require taxpayer subsidies make it impossible for privately owned profit-making companies to compete and thus create inefficiencies in the economy.
Subsidized companies can contribute to the well being of a country, provided that they are self-supporting. However, some governments establish and maintain enterprises for other reasons; these enterprises destroy wealth when they require government subsidies to continue. If the treasury pays few such subsidies, the country receives a high score.
While the numbers are frequently hard to find, it is helpful to know what percentage of GDP is from government owned enterprises. But, a government owned enterprise may be beneficial to the economy. The critical test is whether the government provides subsidies to keep the company going. If a large government owned company needs and receives government subsidies to survive, then the country receives a low score on this policy.
Recently in China, the government provided such subsidies because there would be too much unemployment if some subsidized companies failed.
32. Pro-business climate
If the society places a high value on business, then more people will consider enterprise leadership as a career and more businesses will be created. When business persons enjoy high social status and encouragement from the government the country receives a high score.
For example, when you are introduced to a business owner, if you assume the person is a criminal, then the country will receive a low score on this policy. This was the case in many countries of the former Soviet Union.
31. Layers of collective action
Many layers of collective action help create a middle class of experienced managers who are then able to consider starting a business. Also, the responsiveness to local problems that produces in a society encourages middle class people to stay instead of moving to a different country.
Countries with a wide variety of collective enterprises develop a tradition of accomplishment and leadership. Elected school boards, city councils and volunteer groups give many people an emotional stake in the country's future and also provide a steady supply of seasoned managers. Countries wherein there are many locally elected bodies that are not dependent on the central government for funding or appointed officials receive high scores.
For example, if the elementary schools in your small provincial city are managed by a school board whose members you elect from your community, then a higher score should be assigned provided this method applies to police, water, sewer, education and other community activities.
On the other hand, if the people who manage community activities are appointed from a central city far away from your community, the country receives a lower score on this policy.
GROUP 4: IMPORTANT EXTERNAL POLICIES
30. Management of foreign currency budget
Well managed countries recognize that foreign currency surpluses and deficits have multiplied effects on the economy because of the fractional reserve banking system; these countries do not accumulate large surpluses or deficits of foreign currencies. Either imbalance reduces the economy's strength. Large balances of payment deficits effectively reduce the money supply thus reducing overall consumer demand and business opportunities.
Countries receive high scores when the combined balance of payments for goods, services and real capital transfers is close to zero.
The analyst locates foreign trade statistics about the country and provides the total of last year's exports of goods and services [in US dollars or in national currency] and then subtracts last year's imports of goods and services. If the balance is zero, then the country receives a high score. If the balance is either negative or positive result equaling more than 10% of GDP, the country receives a low score. The analyst will exclude capital flows from this calculation.
29. Foreign trade impact
If trade is too low as a share of GDP, then the country is failing to provide the best opportunity for domestic jobs. If trade is too high, then the country depends on trade and is subject to external shocks to its economy.
Well managed countries rely on foreign markets for a manageable share of their economic output. If trade accounts for a majority of the nation's economy, the country is vulnerable to outside forces. On the other hand, if trade accounts for almost none of the country's economy then it is likely that the country will create more wealth for its citizens by increasing foreign trade. Countries where the total of imports and exports (foreign trade) is about one-third of the GDP receive high scores.
Here the analyst will add together the total annual imports and exports of goods and services and divide the result by the country's GDP for the same year. The goal is to have the total foreign trade account for 33% of the GDP. That will receive the highest score.
28. Strong army
Business owners want safety and security for their families and customers; without a feeling of safety, most entrepreneurs will move elsewhere. A few will stay in unstable situations, but they will move their families out of harm's way and keep operations to a minimum.
The national armed forces should be strong enough to protect the country from armed attack by likely hostile neighbors as well as from attack by revolutionaries or bandits within its borders. Small countries do not require armed forces to protect them from large countries; they rely on defense agreements with protector states instead of diverting massive funds to military uses. Military treaties are discussed in Policy 33.
Countries which have sufficient armed force to protect the nation's borders from attack receive high scores, provided that the cost of the forces is below one-third of the domestic budget.
GROUP 3: IMPORTANT INTERNAL POLICIES
Policies in this group are almost as important to national security as are policies from the first group.
27. Environmental protection
Good environmental regulations protect the quality of life and the value of real property. More people are attracted to a clean area, thus improving the business climate.
Countries that protect their natural environment from harm preserve the value of their resources. Countries which resolve conflicts between resource preservation and resource development receive credit for sound policy making. Countries receive high scores when they protect clean air, water and forests with effective regulations.
Most countries enact legislation intended to preserve the environment, but many countries have little or no enforcement. The score is based on the actual enforcement regardless of the laws. No enforcement and widespread pollution results in a low score.
26. High wage policies
Countries that encourage high wages have larger domestic markets. Strong unions help workers receive high wages.
Obviously, countries with high wage policies must protect domestic workers from low wage foreign competition or the positive effects of the high wage policies will be destroyed. Countries receive high scores when most of the working people can afford to buy consumer goods beyond basic living necessities.
Indicators of high wage policies can include active trade unions, educations and health programs for low income people, etc. Here's the question to ask: can an average single working person who is not a professional afford an apartment, a refrigerator and a vacation? A yes answer results in a high score.
25. Protection of public health and safety
Good management and regulation of waste, food inspection, infectious disease and other public health issues increases wealth in a country. Countries receive high scores when their public health statistics for indicators like infant mortality and tuberculosis approach the highest world wide standards as collected by the UN.
The analyst will locate TB and infant mortality rates for the subject country and then compare those rates to Western, industrialized countries like Western Europe, Japan or the Unites States. Equal or better rates results in a high score while worse rates [i.e., higher rates of TB and infant mortality] result in a lower score.
24. Economic statistics
Accurate and plentiful statistics produce increased awareness of business opportunities. Poor statistics increase risk and reduce investment. High scores go to countries where plentiful statistics are published, provided that independent observers rate them as accurate.
The analyst locates opinions from business people about the quality and quantity of statistics available regarding business opportunities. This policy does not refer to any level of macroeconomic indicators; it refers to the availability and quality of census-like data on incomes, ages, ownership rates of major durables like automobiles and TV sets, etc.
23. Government debt
Good governments manage their debt to avoid any negative effect on economic growth. Large national debts siphons cash away from productive activities thus limiting job growth.
Debt paid to foreigners is more of a drain on the economy than debt paid to citizens. It is possible to manage debt to achieve a high credit rating while still producing a negative force on the economy. Countries with total government debt as a low percentage of GDP receive a high score. A country is considered excessively indebted when the present value of its debt service exceeds 50 percent of its GDP.
The analyst locates the amount of annual debt service [payments] for both internal debt [payments for debt owed to citizens] and external debt [payments for debts owed to foreign entities]. Then this annual payment is compared to GDP.
NOTE: Debt produces a negative effect on the economy because debt service payments take money from wealth creating activities. This is true even if the borrowed principal produces wealth because the total repayment stream will be in excess of the borrowed principal. While inflation reduces the economic cost of borrowed money, inflation creates severe negative effects on the economy and borrowing to finance budget deficits increases inflation. See CONCEPTUAL ECONOMICS.
22. Domestic budget management
Governments which fail to balance their national budget on a consistent basis constrain job growth because any deficit must be borrowed; the borrowed funds are then not available to expand businesses.
Good governments spend as much money as they collect in taxes. Continuing or increasing budget deficits indicate a weak government that caters to special interests. A balanced domestic budget results in a high score for the country. However, if a country attempts to reach zero inflation, it is likely that wealth creation will be reduced; while inflation must be controlled, wise countries recognize that zero inflation is impossible to achieve and allow limited inflation as an incentive to job creation.
The analyst locates the annual national tax revenue and expenditure totals for three or four years. Then performs the math to see if the government consistently spends more than it collects in tax revenues. Governments which consistently spend more than tax revenues by 10% or more should receive a low score.
21. Central bank
A sound currency is critical to business operations. The central bank manages the currency.
Central banks are required to manage the commercial banks in the country and the currency of the country through a fractional reserve banking system. These banks should be independent of political control and charged with producing the most good for the economy in the long term. A country receives a high score when the central bank manages the country's commercial banks and monetary policy effectively and the central bank is independent of political control.
A judgment is made as to whether the bank can withstand the pressure to change monetary policy to please the government or not.
A central bank which effectively controls the money supply, manages the banking system and also acts independently of political pressure receives a high score. Other banks receive lower scores.
20. Common laws
When the public perceives the justice system as biased toward any class, people who are not favored will withdraw from the economic system. This withdrawal reduces new businesses and job creation.
Good governments have the same set of non-conflicting laws, justice and dispute resolution throughout the population. Also, the administration and implementation of the legal system is uniform in all parts of the country and for all parts of the population. High scores result when the legal system is effective and when it is equally fair in all parts of the country.
If a rich person is able to buy better justice than a poor person, then the country receives a lower score.
19. Honest government
Business people are realistic and can tolerate a low level of corruption provided it is fair, minimal and predictable. But, if the corruption is massive and unpredictable it drains too much cash from business operations and reduces new job creation.
Good governments attract leaders who truly wish to help their subjects while poor governments contain functionaries who use their office for profit. Government leaders who work to limit or eliminate corruption create high scores for their country.
A private organization publishes a corruption index of many national governments which is available on the internet. The Transparency International Corruption Perception Index is available at: http://www.transparency.org/policy_research/surveys_indices/cpi/2006
A government's reputation for fair and honest dealings creates a high score for this policy.
18. Institutional stability
Business owners like predictability. If society's core institutions change frequently, a business owner will lose faith in the future and reduce new job creation.
Countries wherein most organizations remain stable for many years create more wealth than those countries where institutions change frequently. Countries with stable governments, courts, schools, law enforcement and businesses receive high scores.
17. Political effectiveness
Natural disasters and terrorist acts injure and kill people. They also interrupt normal business activity. Good governments recognize disaster and fix them.
This improves the business climate even more when it extends to all parts of the country, rather than remaining localized in the major population centers. Countries wherein rural areas are governed as well as urban areas create more wealth. High scores accrue to countries wherein the political process does solve problems.
16. Cultural, language homogeneity
More wealth is created among a population that shares common values, language and customs. Introducing minority cultural groups increases the difficulty of conducting commerce and raises the possibility of armed conflict. When minority groups remain relatively small compared to the majority culture, wealth creation can continue. The likelihood of problems increases when the cultural differences are severe and when the various cultural groups are nearly equal in size. High scores go to countries with cultural and language homogeneity.
There is absolutely no justification here for any forced uniformity such as "ethnic cleansing." Any such action is morally reprehensible on its face. Countries with minority conflicts that remain peaceful create more wealth than countries where ethnic conflicts become violent.
Use of a single currency as money throughout a country encourages commerce within the country. Use of currencies issued by a variety of banks or other domestic bodies discourages commerce. Use of a single currency allows the economic policies of the sovereign government to have predictable effects. The difficulties are more severe when one or more of the currencies preferred for commerce are foreign currencies. Countries receive high marks when the only currency issued in the country is the official, government approved currency.
GROUP 2: CRITICAL EXTERNAL POLICIES
Economic policies in Group 2 are as critical to a country's well-being as the policies in Group 1. An effective sovereign government manages its external policies as well as it manages its internal policies.
14. Border control
Smugglers and other criminals take advantage of weak borders. This drains money from legitimate businesses and reduces job creation.
Effective governments have strong borders. The national government decides which persons and goods shall enter and which shall not. Failure to control a country's borders leaves the wealth creating process inside the country open to any disruption from outside trends. Countries with effective control of smuggling in both directions get high scores.
13. Foreign currency transactions
Business owners who spend too much time changing currencies spend les time on expanding their primary business and hire fewer employees as a result.
Effective national governments require that only the domestic currency is used as money in the home country. All foreign currencies must be converted to domestic currency to conduct business. This creates a single currency and enables the government's fiscal and monetary policies to be effective. Countries in which all transactions are conducted in the official, national currency receive high scores.
12. Protection of Domestic Enterprises
Countries which create the most jobs, growth and wealth protect their domestic companies from foreign competition with tariffs, quotas and other restrictions, while taking care to enjoy the gains from trade wherever possible. [See Ian Fletcher, Free Trade Doesn’t Work: What Should Replace it and Why; www.freetradedoesntwork.com for a complete discussion.] The more effective countries create an industrial policy - that is, they identify the industries they want to grow inside their country and then encourage those industries - and then use trade policy to support it.
The analyst will examine the current trade account for goods and services to determine whether the country shows a surplus - more exports than imports - or deficit - more imports than exports. High marks are given when the trade balance of goods and services in the current account are above balanced or balanced where exports equals imports. Low marks are given for a trade deficit. Financial transactions are not counted in this analysis.
Higher marks are given when the country has an explicit plan to establish some specified industries for future growth and fashions its trade policies to accomplish that goal.
11. Freedom from outside control
Residents and citizens of a country who feel secure from kidnapping by other governments will be encouraged to hire employees and start businesses.
Citizens of any country should be free from control by any citizen or agency of any other country. Countries wherein citizens are subject only to the laws of the home country receive high marks.
GROUP 1: CRITICAL INTERNAL POLICIES
Economic policies in Group 1 are policies critical to the well-being and security of the nation-state. The policies in this group are a government's first priority.
10. Share of All Jobs in Small Businesses
It is possible to use the percentage or share of overall jobs in a national economy held by workers in small businesses as an indicator of the openness of the economy to new business creation. Small to Medium size Enterprises [SME's] are generally held to be companies with fewer than 100 employees. Ideally, a country will have at least half or 50% of all jobs held by employees in SME's. Data for the USA is available from the U.S. Small Business Administration, Office of Advocacy, based on data provided by the U.S. Census Bureau, Statistics of U.S. Business and Non-employer Statistics.
9. Social Mobility
A careful study of several isolated towns showed a positive correlation between open competition for well paying jobs and higher incomes on the one hand and between a nepotistic society and lower incomes on the other. Societies which encourage talent regardless of connections create more jobs than societies where family matters.
See: Worlds Apart: Why Poverty Persists in Rural America, by Cynthia M. Duncan, Yale University Press; New Ed edition (August 11, 2000); ISBN-10: 0300084560; ISBN-13: 978-0300084566
The ability of each individual person in any group in society to advance in earning capacity is critical to wealth creation; barriers to such advancement reduce the society's capacity to create wealth. Jobs in all public sectors must be earned by ability and not given to cronies or family. Additionally, the education system should provide access by all persons to the tools needed by individuals from deprived backgrounds to join the more elite classes.
Highly educated populations create more jobs than poorly educated populations.
Both the quality and quantity of education is critical to wealth creation. All the schools and universities in a country should prepare students to compete with students from other countries as well as other students within the country. Most children should receive an education sufficient to enable them to function in a modern economy. Countries with high literacy rates, high percentages of children enrolled in secondary schools and at University and which Universities are world renowned for excellence receive high marks.
The analyst compares both the percentage of school age population at all levels currently in school in the subject country with a similar measure in industrialized countries. The, the analyst compares the quality of the education received in the subject country with the quality of the education received in industrialized countries. A high score requires that quantity of students as a percentage of the population and the quality of the education received match or exceeds the industrialized world.
Good transportation facilitates the movement of merchandise and people, thereby improving the commercial activity of the country.
All means are included: roads, rail, air, and ship. All markets of the country should be available by at least two transportation means. Countries receive high marks when all markets and population centers are easily accessible to passenger and freight transportation.
The analyst identifies any population pockets that are not readily served by transportation of goods and people. The extent of such pockets reduces the score on this policy.
6. Communication systems
Communication is easily as important to business activity as is transportation.
An extensive network of communication facilities - telephone, TV, radio, FAX, newspapers, magazines, computer networks and so forth - facilitates the introduction of new ideas and business opportunities into a country. High scores are received when communication facilities are ubiquitous.
The analyst describes the communication networks in the country, and then reduces the score for any populations which are less well served than a typical industrialized country.
5. Commercial banks
Businesses need capital to start and expand. Commercial banks create capital by borrowing short and lending long, pooling risk and monitoring borrowers. Job creation requires a sound commercial banking system.
Commercial banks which lend money to enterprises and in which most citizens leave their cash deposits facilitate commercial activity and employment. Countries receive high marks when the commercial banking system is sound and actively finances business operations while limiting its activities in financial, non-business activities.
4. Private property
Laws that protect private property in conformance with local practices so that titles are nationally recognized, instead of extra-legal titles that are recognized locally only, create incentives for individuals to establish wealth creating ventures, producing benefits for the entire economy. Countries where properties owning citizens and foreigners alike have clear and court protected rights receive high scores, provided that all property (real, personal and intellectual) is protected. See THE MYSTERY OF CAPITAL: WHY CAPITALISM TRIUMPHS IN THE WEST AND FAILS EVERYWHERE ELSE, Hernando de Soto, Basic Books, 2000
3. Effective, fair police force
Citizens and enterprise managers need freedom from fear of criminals; freedom from fear of crime encourages maximum new enterprise creation.
A police force perceived as fair by all members of a community allows all members to share a sense of responsibility for the society's future. Minority citizens will be more likely to start new enterprises if they feel they will be treated equally. Countries receive high marks when the police force is efficient and fair.
2. Freedom of speech
A free flow of ideas creates jobs - entrepreneurs get inspiration from every source of discussion and ideas. The more ideas circulate in society, the more jobs will be created.
Citizens are able to express themselves freely without censorship or restriction. This freedom provides potential entrepreneurs with maximum exposure to possible opportunities. High marks to countries with no restrictions on speech or other communication.
1. Freedom from internal control
Entrepreneurs who can move freely inside the country create more jobs.
Citizens are free from positive or pro-active control by government agencies. They are free to move about and engage in any activity that is not prohibited for good reason. This freedom provides the maximum opportunity to create new enterprises and wealth. Unfree citizens must obtain permission before undertaking any wealth creating activity. Countries wherein citizens are free to move about at their own discretion receive high marks.
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