So, I’ll start by admitting that I’m no expert when it comes to economics. In fact the only formal economics training I’ve had were one or two rather poorly taught undergraduate courses at Cornfield University in Nowhere Indiana that left me thinking economists (John Maynard Keynes in particular) were completely full of crap. Then, years later a friend of mine introduced me to Henry Hazlitt’s awesome little book
Economics in One Lesson which, to my surprise and delight, gave the same answers to some of the garbage put forth in my undergraduate economics class that I gave. I’ve since read a little Ludwig von Mises, Milton Friedman and Adam Smith and I’ve found that economics is actually very interesting.
I recently read an older paper that I stumbled across on the internet entitled Endogenous Development and Small Enterprises in the Middle East by Andrea Gallina. The paper seemed to generally describe the business challenges of the region and put forth some theories for how the government might help foster economic development. I wouldn’t say I agreed with the author’s proposed solution, but my takeaway from the whole paper was that the core issue for development in the third world is probably taxation. Yeah… taxation.
Third world governments have more money than you might think, but it is limited and so they must decide where they’re going to get the most bang for their buck. The obstacles to success listed by third world entrepreneurs are access to electricity, access to water, access to good roads, access to heavy transportation, access to communications systems and access to reasonably priced investment capital. I would then naturally assume that development of these commerce enabling resources would be the obvious choice… but it’s not. Why?
In the third world, being an entrepreneur often involves black market (that is, untaxed or bartered) trade in locally produced goods. Because it’s so hard to collect taxes from third world retail transactions, the governments won’t invest in the required resources to make small businesses flourish. My little theory might present a solution to this problem.
My little theory is that we should consider taxing raw materials rather than finished goods. By raw materials I don’t just mean ore and grain, I mean water and electricity and roads and communications systems. Now I know many of those are already taxed, but my point is that we should eliminate taxes from the retail transactions and shift the taxes to the manufacturing and production end of the cycle.
My hope is that by shifting the taxation from the finished goods to the raw materials, all the parties objectives would be more aligned and the governments would be more motivated to facilitate the development of the utilities and roads… because they’d get their money back from the franchise holders that they authorize to provide the services. For example: if the electricity was provided consistently enough that businesses didn’t need generators, they could pay more for the electricity, schedule their production more efficiently, produce more goods and be more prosperous.