2.3.3 Determinants of Benefits
The expected profitability from the investment can be classified into three categories:
(1) the market size,
(2) whether the economy favours production or of diversion, and
(3) the stability of the economic environment.
The size of the market impacts heavily on B. If the market is only local, the
benefits might not warrant the necessary investment costs. However, a larger market,
not to say the world, increases the potential reward to go ahead with the investment
because the “scale effect” related to one-off or fixed costs. Incidentally, if the market
is overseas as well, it is a great help if the country possesses a good harbour lying
along international shipping routes.
The second important profit determinant concerns how the economy’s rules and
institutions
(a) favour production by encouraging individuals to create and trade in goods and
services or,
(b) encourage diversion through theft or expropriate resources from production
units. The diversion may also involve illegal means, such as theft or corruption,
or “protection money” payment. Sometimes, it is legal, as in the case of
government confiscatory taxation, frivolous litigation, or the lobbying of the
government by vested interests. (see also Jeffrey Archer)
Diversion, firstly, acts like a tax on a business. A fraction of the profits is
abstracted away from the entrepreneur, reducing the benefit from the investment,
and acts like a disincentive. Secondly, it encourages the entrepreneur to find ways to
avoid the diversion, including hiring more personnel (lawyers, accountants or
security guards) or pay bribes to minimise other means of diversion. These extra
costs for avoidance are, however, a further form of diversion.
While some taxation is needed for government to fund the institutions and
enforce the rules linked with an infrastructure that favours production, the taxing
power can be exaggerated by the government to engage in diversion. Abuse of
bureaucratic regulation and red tape measures allow government officials to exert
their influence in diverting resources. It is not unknown to have regulations (these are
not publicised in the Press, only in official government newsletter which few people
read) amended each time there is a new important investment proposed by an
investor.
Finally, the stability of the economic environment determines whether the businessman is ready or willing to invest. If the rules and institutions are frequently
modified, he might consider that the country might be a risky place with possible low
returns. While today’s policies in place favour productive activities in an open
economy, tomorrow’s policies might not. Wars and revolutions do not add to the
stability of an economy, but are rather extreme forms of the contrary.
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2 Infrastructure and Economic Growth
The expected profitability from the investment can be classified into three categories:
(1) the market size,
(2) whether the economy favours production or of diversion, and
(3) the stability of the economic environment.
The size of the market impacts heavily on B. If the market is only local, the
benefits might not warrant the necessary investment costs. However, a larger market,
not to say the world, increases the potential reward to go ahead with the investment
because the “scale effect” related to one-off or fixed costs. Incidentally, if the market
is overseas as well, it is a great help if the country possesses a good harbour lying
along international shipping routes.
The second important profit determinant concerns how the economy’s rules and
institutions
(a) favour production by encouraging individuals to create and trade in goods and
services or,
(b) encourage diversion through theft or expropriate resources from production
units. The diversion may also involve illegal means, such as theft or corruption,
or “protection money” payment. Sometimes, it is legal, as in the case of
government confiscatory taxation, frivolous litigation, or the lobbying of the
government by vested interests. (see also Jeffrey Archer)
Diversion, firstly, acts like a tax on a business. A fraction of the profits is
abstracted away from the entrepreneur, reducing the benefit from the investment,
and acts like a disincentive. Secondly, it encourages the entrepreneur to find ways to
avoid the diversion, including hiring more personnel (lawyers, accountants or
security guards) or pay bribes to minimise other means of diversion. These extra
costs for avoidance are, however, a further form of diversion.
While some taxation is needed for government to fund the institutions and
enforce the rules linked with an infrastructure that favours production, the taxing
power can be exaggerated by the government to engage in diversion. Abuse of
bureaucratic regulation and red tape measures allow government officials to exert
their influence in diverting resources. It is not unknown to have regulations (these are
not publicised in the Press, only in official government newsletter which few people
read) amended each time there is a new important investment proposed by an
investor.
Finally, the stability of the economic environment determines whether the businessman is ready or willing to invest. If the rules and institutions are frequently
modified, he might consider that the country might be a risky place with possible low
returns. While today’s policies in place favour productive activities in an open
economy, tomorrow’s policies might not. Wars and revolutions do not add to the
stability of an economy, but are rather extreme forms of the contrary.
42
2 Infrastructure and Economic Growth