Thursday, November 15, 2018

Income Disparity is at an All-time High. What should we do about it? (Part 1 of 2)

 At the Country Level

Economic Opportunity! Economic Opportunity! Economic Opportunity!

  1. Develop Basic Infrastructure with Private Cooperation – A country with well-developed infrastructure can attract more high quality foreign and domestic investments than their counterparts who are struggling to ramp up their infrastructure. Therefore, the poorer 3rd world and developing countries should intensify the development and expansion of the basic infrastructure – instead of selling out their natural resources – by enticing private companies (well-known local and foreign) to provide the leadership in that sector. For example, those companies could be encouraged to build new toll highways and bridges, railroads, metro/light rail, ports, airports, rural electrification, tele-communications, etc. shouldering all costs in return for all revenues (at pre-negotiated resell rates) from those projects for the first 15 to 20 years. It would be win-win. With the rapid growth of infrastructure, the credit ratings of those governments would improve. On the other hand, companies investing in infrastructure would get a steady and predictable revenue stream (revenue for 12 to 18 years post completion).

  2. Let the Revenue Cycle Continue – When the ownership returns to the government, they can once again auction off those projects (revenue rights/maintenance obligations) generating significant upfront revenue to reinvest in derivative infrastructure, e.g., schools, hospitals, national/state parks, etc. In order to maintain the tempo of growth, governments must not get into the business of “running” any basic infrastructural services. Of course, they should be in the front-end (deciding on the location, type, extent, etc.) and back-end (audit and oversight), but not in the mid-end (actual “running” of the services). At that point, the toll, utility and transportation rates would be much lower (considering they would be paid for) benefitting all consumers, including the new arrival of businesses needing better and faster transportation and communication services.    

  3. Avoid Bridges to nowhere – The participation of the private sector will help avoid building non-productive bridges to nowhere as they will conduct their own feasibility studies with rigorous cost-benefit projections. With the expansion and renewal of the basic infrastructure, those countries will become more attractive for foreign investments. Of course, they are inherently foreign exchange poor so enticing foreign investments with more competitive infrastructure will be the path forward. As the multi-national companies find out the growth of investment-friendly infrastructure in those countries vis-à-vis their surrounding peers, they will be more eager to explore direct and joint venture investments there. Needless to say, they are also constantly looking for new markets to explore and penetrate!
  4. Entice Neighbors to Follow the Successful Example – Of course, with the rising prosperity comes the border issue. A good leader sets examples others are enticed to follow. Today, we live in a world of economic cooperation and free trade so building a Chinese wall around the country’s border does not lead to lasting economic prosperity; rather, successful countries must encourage the poorer neighbors to follow the successful example and shore up their own basic infrastructure, thus paving the way for a concerted regional revitalization and growth. This is how the refugee problem (from the neighboring countries) is best avoided.

  5. Develop Regional Economic Zones – As the regional renewal gains momentum, countries must work together on creating their own economic zones, letting goods and services flow freely across borders without the costly and unnecessary taxes, tariffs and barriers. With economic zones in place, it would be easier to convince corporations to build toll-ways, bridges, waterways, etc. across borders, offering better scalability and enhanced economy of scale. Countries must experiment with and use (economic) growth models that are sustainable. In fact, G-7 down to BRICS must aid and cooperate with the countries that become signatories to an economic model emphasizing regional growth, renewal, cooperation and development of economic zones.   

  6. Create Tax-free Enterprise Zones – With the rapid growth and expansion of the basic infrastructure, countries will need to set up tax-free/tax-abated enterprise zones around the country. It does not make sense to build all infrastructures around a handful of big cities, making them even more overcrowded. It must be a distributed and decentralized economic model, with the emphasis on enterprise zones, including affordable housing. 10-15 year tax abatement is a good incentive to attract an array of big and diverse group of companies from around the world, vertically integrated with the growing infrastructures. A decentralized model would help people live close to their roots – an ideal way to keep employee turnover and absenteeism low and morale always high. New payroll taxes along with the derivative revenue taxes would initially compensate for the lost corporate taxes. Upon expiration of the tax abatement period, the corporate tax revenue would start to kick in, enriching the exchequer by leaps and bounds.

  7. Invite For-profit to Build Institutes of Higher Technical Education – As those countries start to develop the service sector (atop the manufacturing sector), a steady flow of qualified employees with higher technical education would be needed. Again, instead of the local governments getting involved and controlling this layer of education, the private for-profit companies might be invited to build and run the institutes, with initial concentration in enterprise zones, as an added enticement. While the acceptance must always be merit-based, governments must significantly subsidize all economically disadvantaged students, to avoid having to implement a quota system down the road. Furthermore, the interested students must have equal access to all competing schools across the economic zone. Again, a steady flow of technically qualified local employees is critical in enticing companies to invest in the service sector.

   8. While governments should stay away from running all non-essential services, they must be involved in properly managing their natural resources along with all essential services like military, law and order, taxes, basic education, healthcare, clean water, etc. Countries that are built on moral (not religious) high grounds are more attractive to investors. For example, in many 3rd world countries in Africa, Asia and Latin America, young women do not have equal access to education (a crime against humanity!). “Equal access to education” must be a primary metric all foreign companies must use in evaluating the investment climate of a country, thus forcing those evil regimes to return to the basic decency and morality we must all follow and promote. While evaluating direct foreign aids, foreign governments must also use this as one of the primary “humane” metrics.

  9. Negotiating Trade Deals – When a rich country borders with poorer countries, it is prudent to consider the collective economic interests while negotiating trade deals. Case in point: Whether we build a wall on the southern border or not, while re-negotiating trade deals with Canada, Europe, Japan, China and the rest of BRICS, etc., the US must wrap around the economic interests of the Central American countries. Their growth and upliftment is in our best interest. For example, many successful companies from around the world would be interested in the US market but they might not be able to initially meet our wage levels. If a common trade deal is in place, those companies would set up their initial shops – manufacturing, processing, assembly, IT, research, etc. – in one of the Central American countries with lower wage levels, with unrestricted access to the US market. No doubt, given time, they would be setting up shops here, hiring locally and paying our prevailing wages. Meanwhile, we have to consider Central America as our enterprise zone, enticing and redirecting vast amounts of second tier economic activities (we are losing those businesses, anyway!) from around the world to them. Let Central America be our nurturing ground. It will be win-win. Once we have a level playing field, they will be our full world partners, not just our enterprise zone. In not too distant future, we will have fast-track lanes at the border for them. No human crisis is ever solved by building walls; they are solved by creating meaningful and cooperative economic opportunities. And, it’s never too late!      

- Sid Som, MBA, MIM
President, Homequant, Inc.

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