austin-murphy-the-triumph-of-evil

244 THE TRIUMPH OF EVIL
However, excessive investment subsidies or encouragement to businesses
that compete with firms in foreign countries could lead to retaliation
by those fo reign countries in the fo rm of protectionism or offsetting
encouragement for their own businesses (Wong, 1997). Anis and
Ross (1992) have noted cases where export subsidization can benefit
both the importing and exporting countries, but they also admitted that
retaliation may occur in many circumstances.
To reduce the chance of some form of protectionist retaliation, proposals
are sometimes made to increase investment and savings in the
economy as a whole, such as with tax policies to encourage general
investment in capitalist countries or direct increases in allocations of
GOP to investment in socialist countries. Such policies will have a positive
effect on the trade sector to the extent that they also improve the
productivity of industries which compete in international trade. However,
such policies can also increase real GOP growth, and the resulting
higher real income can increase the demand for imports, therefore offsetting
the productivity effect and sometimes even exasperating a BOP
problem (Obstfeld and Rogoff, 1996).
In addition, the policies that encourage investment in capitalist systems
are ones that tend to make the wealthy investors richer and so
may cost the less fortunate shorter-term, especially since the increase in
investment is at the cost oflower current consumption. Moreover, while
investment can also be increased by attracting foreign capital, Wheeler
and Mody (1992) have empirically found that merely offering foreign
investors tax and other incentives has relatively little effect on foreign
investment decisions, as the factors of most concern to foreign investors
are good infrastructure, special input advantages, and an expanding
domestic market.
It should also be mentioned that simply lowering income tax rates
and imposing a free market economy in a country are often especiall�
counterproductive solutions to a BOP problem. For instance, such policies
may simply result in increased consumption spending (including
on imports) and thus increase a current account deficit (Peeters, 1999).
In particular lower personal income tax rates decrease the incentive to
engage in business investment (Gordon, 1995) and provide less incentive
for the rich to engage in tax dodges that require investment (such
as purchasing real fixed assets to obtain depreciation tax deductions
CHAPTER 6 245
and engaging in buy-and-hold strategies with reinvestment of earnings
to avoid taxes on investment income and capital gains ).'2 Moreover,
Zinn (1995) and Strobel and Peterson (1999) have reported evidence
from the USA of a positive relationship between corporate income taxes
and investment, implying that lower corporate taxes may merely permit
more consumption of returns to capital. Privatization of state assets can
also reduce the level of investment if the proceeds from the sale are
consumed by the government, or by individuals if rebated to them in the
form of tax reductions (Mackenzie, 1998). In fact, there is actually little
evidence of the efficiency and productivity of the overall economy being
improved by imposition of free market systems, as real growth has historically
been higher in socialist countries (Murphy, 1998), implying
that the synergy of state control tends to enhance productivity more
than market decentralization.
For instance, New Zealand has undertaken a free-market, low-tax
strategy since the mid-l980s (Quaintance, 1998), and the result has
been economic stagnation, with very low capital formation, low R&D
spending, and low infrastructure investment (McCoughlin, 1993). At
the same time, there has been a large increase in New Zealand's current
account deficit, which has been magnified by the country's own unilateral
removal of protectionist barriers in the 1980s. The free market
model has actually resulted in the New Zealand government reducing
spending in productive areas like education and infrastructure at the
� time it provides none of the traditional productive business sub­
Sidles like export financing (Barber, 1996) and general business assis­
tance (Brockett, 1999).
In addition, New Zealand's movement toward the privatization of
� companies has led to myopic business policies that do not benefit
Its economy or its BOP. For instance, the privatization ofNew Zealand's
ernment airlines has resulted in air fares that make it far cheaper
r
or New Zealanders to travel abroad than for foreigners to visit New
Zealand. Assumedly, the airlines have set prices that maximize their
:0 profits irrespective of the effect on New Zealand as a whole (as
Z:l for a private company). As a result, there are as many New
are fl � S pending their tourist money in foreign countries as there
� :gn tourists in �ew Zealand (Massey News, 199 . 9), des�ite t�e
New Zealand ts one of the most attractive tounst locations m