I was visited today by a cabinet minister from a medium-sized, middle income country (which shall remain nameless for the purposes of this post). He explained that, among other challenges, he faces the task of attracting foreign investors to his country. He related the story of how he has just induced a large IT multinational to make a big investment by providing it rent-free space for 10 years on a public site. In view of the subsidy, he had to bring the finance minister on board. But he said that had not been a problem. The finance minister was happy to approve the benefit.
When you hear this story, which one of these two responses comes closer to how you feel about it:
A. Great! Another government gleefully wasting the public's money. When will those developing countries learn that you do not get ahead by distorting market forces. If the multinational needed a subsidy to be persuaded to come in, the social value it produces must be less than the social cost of the resources it will gobble up. Plus in this instance, the subsidy goes straight to foreigners.
B. How wonderful! For once a finance minister who understands that sometime you may need to grease the wheels of market forces to get you the kind of investments that you need. It may cost the budget money, but these kinds of things are the tonic on which growth depends. Economic development requires structural change, which market forces do not adequately reward. If this enables the country to set up a new IT hub, the policy will achieve its purpose.
Think about that one for a while.
And then see if the following piece of information changes your mind. The minister told me that he had looked at the pros and cons of giving the multinational the subsidy, and in the end he had figured that the likely increase in property values from the multinational's presence--and the extra taxes that would bring in--made the subsidy a good deal for the government. Now which one of these positions do you take:
A. Yeah right. I bet this argument was fed to the minister by the firm itself. Probably on the back of a napkin with some kind of graph...
B. Well, entirely possible. Sometimes you do need a pioneer investor to get things started. Many industries in the developing world have been spawned from initial investments like this one--often made on a non-commercial basis.
And finally, suppose now you are told that the country in question is one that has averaged 4 percent growth on average (in per-capita terms) for the last 4 decades. Which would be your response?
A. Well clearly they would have grown even faster without policies of this kind.
B. I knew it!
So, what kind of economist are you? A Type-A one or a Type-B one?
UPDATE: OK, seeing the range of views reflected in the responses below has been quite useful, I think. And I do apologize for presenting such a simplistic, A-or-B kind of picture, when pretty much everything I write calls for nuanced, context-specific responses. The reason I presented this choice is that I find many economists go instinctively for the A-position--something that is fully borne out in the responses below. In reality, and (I emphasize) sometimes, the B-position is the one that really pushes an economy go forward For my own views on these issues I am afraid I have to refer the interested reader to lengthier accounts. See this and this.