7 August 2023

The market should lead the way on levelling up


Levelling up is a magnificent cause. But to achieve it, it is crucial that we learn from countries around the world that have grown their way out of hardship and low incomes. And we can also heed the warning from those countries that are busily levelling down, despite having the best of intentions. 

We can see this pattern in Democrat and Republican-led states in the United States. In each case, the governments that welcome the private sector create a good background for self-employment, small business and large corporations. Their responsible public spending lifts millions out of low incomes and worklessness. But in the states led by well-intentioned socialists who want to expand the state, provide more subsidies for the poor and tax the rich, they end up driving more people into poverty. 

Another good example is Venezuela. The country is endowed with the largest oil reserves of any country in the world, including Saudi Arabia. But successive rounds of penal taxation, stringent regulation and nationalisation have killed the golden goose of a once successful industry. 

Venezuela struggles to produce one tenth of the Saudi oil output. It finds it difficult to get its wells working and its refineries repaired. It lacks the foreign currency to afford all the parts and expertise it needs from abroad to get its energy sector working again. It has lost many of its most-able and well-qualified people; they can no longer make a living there and are seen as candidates for penal taxation, should they find a way to earn more. The supermarket shelves are often half empty and customers who do have sufficient money to buy things have to scout around to find something to buy. Inflation has taken off to very high levels, currently sitting at around 400%. Central interest rates are at 57%. Venezuela is socialism in action. All rules, high taxes, subsidies and government control.

On the other hand, today’s success stories include Singapore and Taiwan. These Asian dynamos keep tax rates low, attract substantial foreign capital and overseas business, nurture local talent and attract people from around the world to visit, trade and learn from their achievements. 

Singapore was thought too small to be independent and was deemed unwise to separate from Malaysia. After a difficult beginning, the state has shown that it is possible to be small, independent and prosperous. 

Taiwan, despite the difficulties from her huge neighbour – the People’s Republic of China – has delivered far higher incomes per head and living standards than the communist mainland. 

In the USA today, a more moderate version of the Venezuela versus Singapore policy experiment sees major migratory flows from California to Texas and from New York to Florida. 

Florida and Texas, two Republican states, keep state taxes low, welcome new business and offer a light touch regulatory environment to make prosperity possible. New York and California keep taxes high, run bigger state budgets and regulate more intrusively. There are large movements of people from the Democrat to the Republican states, as people seek better homes and jobs and lower taxes. They meet there large numbers of migrants from abroad, also attracted to the opportunities that Texas and Florida create. 

To level up, the state needs to have low rates of tax on income and business. It needs to offer good properties and land to build on to attract richer people who are prepared to invest in the area. It should help to find industrial and commercial space and grant development permission to those who want to build a business. It needs to offer good communications and utilities, so businesses are able to get the raw materials in and the finished goods out. 

Businesses require plenty of power, broadband and water for their activities. They also need to be able to recruit willing employees to train and promote as they grow. You do not make an area rich by nationalising the main facilities and by taxing businesses and entrepreneurs away. Nor does it help to lay down what you can and cannot do in such detail that people would rather live and work somewhere with more liberty. 

This article first appeared in Bright Blue’s Centre Write magazine, ‘Back to business?’

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Sir John Redwood MP is the Conservative MP for Wokingham and a former Secretary of State for Wales

Columns are the author's own opinion and do not necessarily reflect the views of CapX.