Traditionally the economic discussion of tax structure and public spending has looked at the impact on the economy’s efficiency in using resources. However recently there has been increasing evidence that growth may be ‘endogenous’ (i.e. the result of people’s choices, and therefore potentially influenced by policy) rather than ‘exogenous’ (i.e. given by external forces over which policy has no identifiable influence). This leads us to consider the effects of taxes and government spending on growth itself – the focus of my chapter (with Jiang Wang) in Sharper Axes, Lower Taxes.






So far, so good for those who think incentives are important for growth. This evidence is not the only sort available. There are many similar studies of growth and taxes, from the OECD and elsewhere – detailed in our chapter. We also have (mainly due to Parente and Prescott) studies of episodes such as ‘growth miracles’ (Hong Kong, China, India) and ‘growth disasters’ (the Congo, Sudan, Zimbabwe). They show pretty clearly that if you create barriers to business, you destroy growth and vice versa. This is a pure incentive story. You can strengthen it by reflecting that India grew pathetically under the Nehrus when all the rage was building infrastructure and expanding education (so that India had a record rate of unemployment among PhDs); when it was liberalised, growth broke out.

However, there is still work to be done to settle the matter. The problem is that these correlations can be found between growth and many different variables, if you are willing to work hard enough at gathering ‘helpful’ data. For example, take the case for education or ‘human capital’ as the cause of growth: human capital is hard to measure and with not too much effort one can find a measure that is correlated with growth. The same goes for such things as the level of infrastructure, or R&D. How then to distinguish between these causal theories? Here is an example of the difficulty: do education levels cause growth and then growth cause barriers to business to come down? Or do barriers coming down cause growth and growth then cause there to be more education spending?



Shadow Monetary Policy Committee

Patrick Minford has been the Professor of Economics at Cardiff Business School, Cardiff University from October 1997. Between 1967 and 1976 he held economic positions in: the Ministry of Finance, Malawi; Directors' staff, Courtaulds Limited; HM Treasury; HM Treasury's Delegation to Washington, DC; Manchester University; and the National Institute for Economic and Social Research. From 1976-1997, he was a Professor of economics at Liverpool University. Patrick Minford was also a member of the Monopolies and Mergers Commission between 1990 and 1996 and one of HM Treasury's Panel of Forecasters (the 'Six Wise Men') between January 1993 and December 1996. He was awarded a CBE for services to economics in 1996 and is the author of: books, articles and journalism on exchange rates, unemployment, housing and macroeconomics. Patrick Minford currently directs the Julian Hodge Institute of Applied Macroeconomics at Cardiff University Business School.