The world is moving slowly into another recession. Europe is going through a sovereign debt inspired credit crunch. India’s industrial production dropped 5.1 per cent in October from a year earlier. The Guangzhou government’s land sales program has seized up decreasing the province revenues by 70%. The United States has a massive deficit and political grid lock.

 To resolve these issues the world has resorted to all sorts of economic solutions. In China they tried fiscal stimulus through massive bank loans, but only ended up with inflation and a housing bubble. The US tried quantitative easing, but only helped to create a commodities bubble while devastating savers and pensioners. The EU now is trying fiscal discipline, which will surely result in a recession. They have tried everything except the one thing that actually would work and cost nothing. They can’t resort to this simple solution because of politics. Printing money does not have a political downside. Real reform does.

 Business cycles will always be with us, but economies are more resilient if their legal systems, their legal infrastructures, are economically efficient. In short their systems must make business easier. For example if you look at the World Bank’s Doing Business rankings, the economies that have survived and even prospered during this recession are the same economies that rank very high in the index. They include Singapore, Korea, Hong Kong, Norway, Sweden, Denmark and Canada. The US has a good ranking and has definitely had its problems, but nowhere near the issues of other many other countries. Two other countries near the top also help prove the thesis, Ireland and Estonia. Both countries recently were considered economic basket cases. Yet both countries have been able to go through painful ‘internal devaluations’ and are growing. In fact Estonia’s growth in the first quarter of the year was a blistering 8.5%, the highest in the European Union.    

 Despite their devastating effects countries all over the world continue with disastrous policies. Subsidies are one of the worst. Nigeria is one of the world’s largest oil producers. Not surprisingly with its vast mineral wealth it subsidizes petroleum, which was meant to help the poor. Yet the cost of the subsidy is so great that it almost exceeds the oil export revenues. It also has created enormous inefficiencies and corruption. In the US a subsidy for ethanol has made it this year the cheapest motor fuel, but at the expense of higher food prices.

 Laws in many countries that are supposed to protect labor have resulted in coddling some workers and insuring that others cannot get jobs. The labor market in Spain has become a two tiered system. Older workers with jobs are protected from layoffs and have good benefits. Meanwhile it is so difficult to hire and fire workers that the unemployment rate among younger workers tops 40%.

 Brazil has a labor code taken from Mussolini’s Italy. It is just about as devastating. Getting rid of a worker without “just cause” can result in a fine of 4% of the total amount the worker has ever earned. The employee’s incompetence or the bankruptcy of the company are not considered just cause. Like Brazil, India’s infamous inflexible labor codes have made it impossible to take advantage of its inexpensive labor.

 Revenue for the state usually in the form of taxes is a necessity, but how it is collected makes a big difference. In China since all land belongs to the state, so with a few experimental exceptions, there aren’t any real estate taxes. This makes the governments dependent on sales of land (actually sale of long term leases of up to 70 years) to developers for up to 40% of their revenue. Local governments also use the land as collateral for loans from state owned banks. This system worked well as long as the money kept flowing and the prices kept rising. When Beijing restricted real estate sales and tightened lending, the real estate bubble started to collapse with potentially devastating consequences.

 Subsidies, inflexible labor markets, and poorly designed tax codes are just the tip of an enormous iceberg. To these problems you could add protectionist policies, failure to protect property rights especially intellectual property rights, slow or corrupt judiciary and transparent markets.

All of these problems have to do with laws. Laws can be changed at no cost. Reforming these laws and policies could be an enormous stimulus for any economy, but changing them is almost impossible. Every law creates systems of economic winners and losers. As Mancur Olson freerider thesis predicted, those who benefit are willing to fight tooth and nail to protect what they consider their property interests even if it means economic suffering for all of their fellow citizens. So without real reform, a global recovery is nowhere in sight.