Lawlessness and Capacity-Constrained Inflation

Much has been said about interest rate policy in addresssing the underlying inflationary crisis in the third-world (i.e. raise interest rates and as a result reduce liquidity and hence squelch inflationary pressures in affected economies.) A more fundamental concern that needs to be addressed however, is lawlessness and capacity-constrained inflation. What I am alluding to is the lack of sufficient local capacity to meet the demands of the populace, driven by rampant lawlessness and theft in an economic regime. Which businessman in his or her right mind is going to make the long-term capital investment in plant, property, and equipment required to establish or increase capacity for a good or service (and hence reduce inflationary pressures), if there is flawed law or no law to protect them from confiscatory or predatory actions on the part of the state or powerful interests tied to the state? Any third world regime seeking to tame inflation in its society (or risk getting overthrown by a constituency that can no longer afford to feed itself) needs to address the root causes of corruption and strong-arming inextricably tied to its elite, and to do so it needs to have a judiciary and legal system free of flaws and immune to bribery, corruption and intimidation in its own right, combined with a viable enforcement and deterrent vehicle to execute its will. It really is as simple as this.

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