The Big Bang of Economic Freedom

Why is it so difficult to implement the deregulation needed to make an economy more competitive? Why do so many governments try to achieve this end, and why do almost all of them fail? All citizens stand to benefit from competitive markets for products and services, but more often than not, the broad coalition required to sustain pro-competitive policies never materializes; political support simply isn't there. Why?

This question is important not only in transition economies and other emerging market countries, but in rich countries as well--in fact almost everywhere, except possibly the US and the UK, which long ago embarked on a process of radical and far-reaching economic liberalization. New Zealand and Ireland followed suit and their economies have been booming ever since.

Lack of competition is typically due to over-regulation. Taxicabs in European cities are expensive because the number of licenses is strictly controlled. With market entry blocked, license owners face little pressure to hold down fares, and the officials who allocate licenses are well placed to collect votes or bribes. In short, regulation tends to distort incentives, stimulating what economists call rent-seeking behavior: the taxi driver and the license official collect unearned premiums (rents) solely because they can exploit their position as insiders, not because they are more productive.

Notaries are another example of this phenomenon. Public notaries in many countries charge extremely high fees for services that are virtually useless. Fees are high because the notaries themselves control access to their profession. Without government regulation (including rules requiring that consumers purchase their useless services), public notaries would not have the position from which they draw rents.