Bureaucracy: The Red Tape that Prevents Economic Growth

Javier Milei’s chainsaw policy has been without a doubt one of the most interesting and important topics of discussion in world politics. Argentina has taken important measures since Milei assumed the presidency to revert the tragic economic situation that the country was facing. Perhaps one of the most important measures is the adjustments and cuts in the state, the colloquially called “chainsaw policy.”

Two months after Milei assumed the presidency, nine thousand state jobs had been eliminated, and by the end of March fifteen thousand layoffs had been ordered. Furthermore, when Javier Milei spoke at the IEFA Latam Forum, he mentioned that seventy thousand contracts of public employes were going to be canceled. He also mentioned that two hundred thousand social programs were eliminated, and public works were also eliminated.

Not surprisingly, the state has not only not collapsed, but it has experienced its third consecutive fiscal surplus, showing unequivocally to the world that the excessive state bureaucracies do nothing but harm. There is no need for a giant state apparatus that runs every aspect of our lives. It is not only useless but has grave moral and economic repercussions.

In Bureaucracy, Ludwig von Mises writes,

It is quite correct, as the opponents of the trend toward totalitarianism say, that the bureaucrats are free to decide according to their own discretion questions of vital importance for the individual citizen’s life. It is true that the officeholders are no longer the servants of the citizenry but irresponsible and arbitrary masters and tyrants. . . . It is further true that bureaucracy is imbued with an implacable hatred of private business and free enterprise. But the supporters of the system consider precisely this the most laudable feature of their attitude. Far from being ashamed of their anti-business policies, they are proud of them. They aim at full control of business by the government and see in every businessman who wants to evade this control a public enemy.

The constant increase of government and bureaucracy size has been a sad and terrible tendency in the entire world since the 1930s, and bureaucratic procedures represent a high burden of time, effort, and money for potential businesses. Data from the US Bureau of Labor Statistics shows that around 20 percent of new businesses fail during the first year, and 45 percent fail during the first five years (in the United States).

And if those are the numbers of new business success in a huge and comparatively prosperous economy, we can only imagine the difficulty of becoming an entrepreneur in nations that are plagued with constant economic crises and giant bureaucracies.

Ibero-America is a prime example of a region negatively impacted by the effects of bureaucratic processes. The Atlas Network’s Latin American Center, together with the Adam Smith Center for Economic Freedom at Florida International University, developed the third edition of the Index of Bureaucracy in Ibero-America 2023 covering seventeen countries. This is an index that calculates the number of hours demanded by bureaucratic procedures from small businesses—the hours required to start a business up to its operational launch and those required to keep the business legally and formally operational.

The Starting Bureaucracy Index yields an average of 2,666 hours, meaning that to start a business you would need the equivalent of 111 continuous days or 154 working days. And the Bureaucracy Index for Operations yields an average of 902 hours per year, equivalent to 38 continuous days or 113 working days, which is 43 percent of a worker’s working time solely devoted to bureaucratic compliance. Both exhibit high dispersion, meaning that there is a considerable difference between the highest and the lowest, making it worth taking each country case by case.

If we take the case of Bolivia, we can see in the regional report by Libera Bolivia that starting a business requires a minimum of 528 hours (22 days) distributed across 12 procedures and 10 different government entities, and that number keeps increasing for specific procedures. In the case of companies engaged in agricultural cultivation, the specific procedures with the health authority require an additional 2,880 hours (120 days) on top of the general startup procedures. So depending on the type of company, it can go from 528 hours up to 3,072 hours. And the total duration of operating procedures, taking the weighted average according to the importance of each sector in the economy, in Bolivia is 1,239 hours annually.

When such a burden is set on the backs of entrepreneurs, it is not surprising that informal and illegal channels emerge and corruption thrives. As of 2022, 83.7 percent of Bolivia’s employed population was in the informal sector, and Bolivia was ranked 126th out of 180 in the Corruption Perceptions Index 2022. The truth is that an environment so overloaded with legal and bureaucratic procedures creates a situation in which the only way to be able to do business and make a living is through back channels, an environment plagued by danger, corruption, lack of property protections, and constant governmental persecution.

The simplification and reduction of bureaucracy is fundamental for the development of any economy, not only to promote efficiency but to improve the quality of life of the citizens of each nation through more job opportunities. How much could people do with the time and money lost in the bureaucratic machine? One can only imagine such a prosperous world.

One hopes that the rest of the world will take the chainsaw policy of Javier Milei as an example and cut the infinite barriers of the government, allowing for prosperity and wealth.

Originally Posted at https://mises.org/

By Mises