Tuesday, April 26, 2005

Laffer, Lorenz and Pareto

As there has been little interest in directing the topic of this post, I am shying away from expounding on my personal manifesto for the economics of the region. What I would like to do is draw reference from the work of some more famous economists that I feel has a great deal of relevance to what the real problems are.

The Laffer Curve represents the rate of return from the imposition of taxes and duties and typically looks much like a Bell Curve, i.e. rising upto a point after which it declines and looks much like a bump. The idea behind it is that the imposition of duties will raise funds for the imposing authority, but at the stage that the duties become too high, then the income generated from them declines until there is no further income because, the assumumption goes, the companies against which the duties will be applied will simply move their business to a more duty-efficient regime. All of this is to say that applying a duty on a particular economic system has to measure the affect that duty will have on certain businesses and at what stage would those businesses move somewhere else.

The Lorenz Curve is a much more interesting for our purposes in that it represents the percentage of the wealth that is held by various segments of society. As is typical of a developing economy with an under-developed middle class, our Lorenz Curve would be heavily weighted towards the top end with a small percentage of the populace controlling the vast majority of the wealth.

This is where it all begins and ends as far as I am concerned. A job for everyone, a car in every driveway, a chicken in every pot. When I began my career as a banker with one of the local instiutions (quite a few moons ago), I was arguing that our salaries were too low in comparison to the rest of the region. And, yes, our bottom line would be affected if we were to increase our overheads. But a quick glance at the shareholding base reveals all the major businessmen on the Island. If they were to put more money in the hands of their staff (aside from making them feel better about the firm they work for) what would these people do with the extra cash? They would most probably be buying more goods and services from the self-same businessmen. The effect is a multiplier which would circulate in the economy and generate even more wealth (and hopefully, flatten the Lorenz Curve out a bit more).

There are two directions that this argument can then take: the issue of wealth distribution and/or the profit motive. Which one is more interesting to you? Have comments, will respond.

Oh, and Pareto was a lovely fella, too.


Bahrania said...

hey, just discovered you're blog by accident...

i love the way you play with basic economic theories. then again, thats what the people at McKinseys based their 'controversial' recommendations.

in my humble opinion, I agree with you that the issues isnt just about the labour market, its about directing the economy as a whole. If labour market reforms are to succeed they need to be put in the context of an entire development strategy. I don't know if the EDB is doing that or not, and i can't quite gather it from their website. In theory, sustainable economic growth should reduce unemployment, and an efficient market should correct price imperfections including wages.

Underlying growth is investment, both foreign and DOMESTIC. Right now, many complain of the weak domestic investment infrastructure. I don't recollect either that the 'report' touched on the role of Small and Medium Enterprise's (SME's) as the main engine of economic growth and the biggest souce of employment. The current situation seems to me to discourage, if not supporting small businesses.

Dunno if that is relevant to the debate at all. Written spontaneously.


chan'ad said...

If the rich businessmen were to give more money to their staff, this would generate a multiplier for the economy as a whole. But each individual businessman might not necessarily benefit from it... and moreover from his point of view there is too much uncertainly and the benefits will be generated too far down the timeline.

So then how does one go about convincing the businessman to give more cash to the employees? I don't think the "national interest" argument will cut it for them. What do you reckon?