The Flight from (Over-)Regulation to and from China?

25
Mar

Time and time again, public discourse ends up being dominated by headlines revolving around government intervention, more specifically what is expected by the government when it comes to a wide range of public interest topics. For example:

  • What should governments do to tackle global warming?
  • What should governments do to tackle inequality?
  • What should governments to do tackle discrimination?
  • What should governments do to tackle monopolies and oligopolies?
  • What should governments do to tackle criminality?
  • What should governments do to tackle reckless construction?
  • What should governments do to tackle corruption?
  • What should governments do to tackle the spread of fake news?

… we have barely even begun scratching the surface with respect to what one person or another believes the government should do. Time and time again, the narrative is asymmetrically geared toward what the general public wants governments to do come election time, with not that much attention being paid to… well, what the government SHOULDN’T do.

In other words, instances in which no government interference or at the very least less government interference would be preferred. While there are voters who care about this dimension, the scale is clearly tilted toward topics related to the exact opposite: things the government can do to “save” the general public.

From whom?

Anything from evil corporations to evil countries to… even saving the average person from him or herself.

Problems start appearing when governments are so busy “saving” that they pay little attention to the monsters they’ve created in the process, even with the best of intentions (and we all know what they say about good intentions). To put it differently, one of the most pressing challenges of the relatively newly-started 21st century from an entrepreneurial perspective is represented by over-regulation, measures which may seem reasonable on paper one at a time but in aggregate, they essentially choke entrepreneurship in the nation in question.

The end result can best be described as “regulation flight” or, in other words, entrepreneurial-minded individuals fleeing overly burdensome jurisdictions in favor of more business-friendly ones. Perhaps the most fascinating aspect about this phenomenon is represented by the fact that quantitative demographic analysis will not be able to properly explain the magnitude of these trends in light of the fact that for the most part, entrepreneurial-minded individuals represent a fairly small segment of the population.

It is remarkably dangerous how easy it is to dismiss regulation flight as a non-issue, especially in light of the fact that the “flight” of one entrepreneur tends to be more dangerous for the economy than the flight of an employee, since the entrepreneur in question might be capable of creating a business that employs perhaps 100 other fellow citizens, maybe 1,000 or even more. Therefore, from the perspective of multiplication or if you will indicators which would be best described through names such as “Economic Value Per Citizen”, this phenomenon can be nothing short of devastating.

Where does China stand?

As always, things are quite a bit tricky.

Why?

Simply because the Chinese situation is so complex that two trends are manifesting themselves in parallel.

On the one hand, we have business operators who are fleeing China for jurisdictions that are friendlier toward the sector(s) they are operating in. A textbook example to this effect is represented by cryptocurrency exchanges, with many of the dominant ones being Chinese at one point in time. However, after the authorities cranked down on this sector, these businesses were forced to either shut down or move to other jurisdictions and seek refuge there. For more information about this particular phenomenon (as it pertains to cryptocurrencies in general, not just exchanges), we would recommend reading our article dedicated to this topic, that can be accessed by clicking HERE.

On the other hand, as explained in another ChinaFund.com article (one which can be found HERE), the exact opposite tends to happen as well due to sheer incompetence to the point of insanity exhibited by many Western bureaucrats, who create layers upon layers of “red tape” to such a degree that many businesses end up no longer being able to generate profits due to excessively burdensome compliance costs. In other words, when it comes to quite a few sectors in the West, many entrepreneurs feel the weight of excessive regulation so dramatically that they end up concluding that the only course of action left is re-locating to jurisdictions such as China, which are indeed extremely volatile but it is at least possible to fly under the radar or find workarounds.

It remains to be seen what China will do next.

Should it pick up on this trend of frustration with over-regulation in the West and revise its own approach so as to become more entrepreneurship-friendly as well as predictable and transparent, it could be on the receiving end of yet another generational opportunity.

Let us not delude ourselves, however.

At this point in time, there are few indications that China is meaningfully interested in embarking on this journey, other than status quo public statement rhetoric.

As such, the ChinaFund.com team believes that the two previously mentioned trends will persist for quite a while, until some sort of balance is reached. Perhaps Western regulators will understand how much economic damage they are doing “for all the right reasons” and decide to tone it down a notch (or two, or three!). Then again, maybe meaningful reform will indeed lead to China becoming truly entrepreneurship-friendly in the (probably distant) future. Or, of course, other jurisdictions could pick up on this generational opportunity and choose to brand themselves as safe havens for entrepreneurs.

For the time being, however, it is quite unlikely that Earth-shattering changes will occur on the Chinese front and the same is valid with respect to the attitude of Western regulators toward entrepreneurship.