The transparency of the regulatory environment for business is an important element in promoting efficiency and reducing bribery. Entrepreneurs need correct and user-friendly information about compliance and where they are in the regulatory process. Regulations themselves, however, can also impede the flow of information between businesses and consumers.
For example, modern businesses cannot operate successfully without advertising: not just through mass marketing, but also through customized information channels that can target specific markets for products and services. Regulations that interfere with advertising are one way by which governments interfere with the flow of information between buyers and sellers.
Knowledge of the marketplace must not be artificially limited only to market conditions within a country’s borders. Protectionism cuts off information to producers and consum¬ers alike about competing goods and services made in other countries. Knowledge of the relative prices and quality of those products — of recent innovations, marketing campaigns, safety testing, and an endless list of other fac¬tors — could help entrepreneurs in the protec¬tionist country to manufacture and sell better products. Knowledge of available inputs aids domestic manufacturers in planning the most effective production processes to maximize productivity.
While propping up inefficient industries, protectionism reduces consumer choice and exempts producers from the need to adapt and evolve to improve consumer satisfac¬tion. It results in inferior goods and services, as well as higher costs, and causes any coun¬try adopting such measures to be industrially crippled and likely to be left in the dust by its more agile, adaptable, and information-rich competitors.
Countries that lack the institutional infra¬structure to collect taxes efficiently usually lack information infrastructure. Perversely, some of the least developed countries in the world receive artificially high scores for fis¬cal freedom and government spending in the Index of Economic Freedom, not because of any particular restraint or virtue by their govern¬ments, but rather because they lack the basic information about who is earning income at what levels. Information provides the vital link between taxpayers and tax collectors, both in communicating what government services are needed and in identifying who has the ability and responsibility to pay for them.
Governments that wish to increase spend¬ing may resort to restrictions on information or the manipulation of statistics in order to hide their intentions from the public. For example, David Walker, who formerly served as the nation’s “Auditor in Chief” as head of the U.S. Government Accountability Office, has warned of a “fiscal cancer” that is threatening America’s future economic viability. Accord¬ing to Walker, “off balance sheet obligations associated with Social Security and Medicare put us in a $56 trillion financial hole,” and the true costs of the Medicare drug entitlementbenefit adopted in 2003 “were hidden from both Congress and the people.”
Countries with large numbers of state-owned enterprises often go even further, exert¬ing tight control of commercial information. This is a hallmark of totalitarian states and one of the principal causes of the economic ineffi¬ciency and stagnation that characterize them.