The power of incentives

Economic incentives are laced into life’s fabric worldwide, so throughly that they are typically taken for granted, and consequently their power is underestimated. It’s mostly at the very margins of society where economic incentives can be felt most ominously. At the margins, they are not simply an economy’s underlying structure. They are all there is, and wages are a pipe dream.

Like many of his Inca ancestors, Juan Apaza is possessed by gold. Descending into an icy tunnel 17,000 feet up in the Peruvian Andes, the 44-year-old miner stuffs a wad of coca leaves into his mouth to brace himself for the inevitable hunger and fatigue. For 30 days each month Apaza toils, without pay, deep inside this mine dug down under a glacier above the world’s highest town, La Rinconada. For 30 days he faces the dangers that have killed many of his fellow miners—explosives, toxic gases, tunnel collapses—to extract the gold that the world demands. Apaza does all this, without pay, so that he can make it to today, the 31st day, when he and his fellow miners are given a single shift, four hours or maybe a little more, to haul out and keep as much rock as their weary shoulders can bear. Under the ancient lottery system that still prevails in the high Andes, known as the cachorreo, this is what passes for a paycheck: a sack of rocks that may contain a small fortune in gold or, far more often, very little at all. Read the rest of this article in January’s National Geographic Magazine….

Workers in the cahorreo system average $3,000 a year in earnings from their monthly sack of rocks; meanwhile the mine yields about $5 million annually, according to the article. Beyond the desire for a better life, there’s more to this incentive structure, extending into the realm of public policy. Mine operators routinely underreport yields in order to avoid high taxes. For the same reason, neither operators nor workers desire a formal – and therefore taxable – wage structure.

There is no shortage of entrepreneurship in the gold economy. Spread out all over the world, 10-15 million artisan (small, often family-based) miners produce one quarter of the world’s annual gold mining yield, according to the United Nations Industrial Development Organization. While the gold mostly reaches formal markets for consumers via traders and retailers (gold is a fungible commodity), these artisan miners remain locked into a parallel economy alongside their cachorreo neighbors, evading the same high taxes and/or burdensome business registration procedures.

Whether for themselves or the mine owners, prospectors also typically endure the toxic mercury and mercury vapors from the gold extraction process. Mercury is one of the deadliest neurotoxins known, yet even the tiniest economic incentives can overcome such bleak odds of survival, much less success. It is a force that market reformers worldwide would do well to harness.

….the miners do not rebel against the system; in fact, they seem to prefer the slim chance of winning big once a month in the mines to the dull certainty of low wages and chronic poverty in the fields. “It’s a cruel lottery,” says Juan Apaza, the gold-toothed miner up on the glacier. “But at least it gives us hope.”

Published Date: December 19, 2008