Author Archives: Mitchell Shabani

Take the power back

Posted on 8 August, 2011 | Comments Off

(Photo: Cato Institute)

With a mostly blank cover page and a quote from Ayn Rand, Ecuador’s largest newspaper, El Universo, protested the court’s ruling against its directors and former opinion editor – three years in prison and a $30 million fine for four lines in an opinion piece.

In the disputed piece, “No a las mentiras” (No to the lies), Emilio Palacios denounced Ecuador’s President, Rafael Correa, as acting like a dictator. President Correa claimed that in the opinion piece, Palacios wrongfully accused him of ordering forces to open fire on a hospital full of innocent civilians. Five months later, the court found Palacios, along with the newspaper, guilty of libel.

The court’s decision has incited the fury of freedom organizations.

To many, the ruling clearly violates basic freedoms. Yet libel and slander are legitimate, destructive offenses that most would agree ought to be prevented. So how is this different?

Among wealth-maximizing individuals in a free society, the freedom of speech and press does not protect slander and libel. Penalizing such negative behaviors incentivizes individuals to internalize the cost of their actions and protects their image and privacy against blatantly false and damaging accusations. In this context, the ability to sue for libel and slander is socially efficient – the law makes society as a whole wealthier.

Unlike individuals, governments are budget-maximizers, not wealth-maximizers. For individuals, the outcome from bad decisions may be bankruptcy. Similarly, firms that make costly, inferior products will lose against innovative, productive companies. Governments, on the other hand, do not typically face such incentive structures, leading them to be more wasteful of the population’s resources. Massively overpaying government contractors illustrates this waste.

As budget-maximizers, governments do not run more efficiently when their image and privacy are protected. On the contrary, criticism and questioning are essential for a more efficient state – one less burdened by corruption, rent-seeking and waste. When citizens are discouraged or outlawed from questioning and criticizing the government, public officials and bureaucracies gain free reign to strip the population of rights.

If citizens make false allegations against government officials, their claims should be subject to society’s scrutiny and evaluation. But they should nonetheless live in an environment without self-censorship due to fear of excessive punishment.

Rather than an effective deterrent against negative behavior, the massive fine is a glaring reminder of who’s in charge. While honor and dignity may be priceless attributes, the $30 million fine (plus the extra $10 million fine to the newspaper company) and three-year sentence is excessive by any standard. This ruling is not about fairly compensating an individual or discouraging socially and economically destructive activity. It is a signal meant to show who holds power and how the media is expected to behave.

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Posted in Latin America and the Caribbean

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Uncharted territory: exploring procurement reform in Russia

Posted on 12 July, 2011 | Comments Off

With corruption in the Russian procurement system costing an estimated $35 billion, many are now calling for reforms to Russia’s procurement laws in hopes of limiting corruption.

The current federal law regulating government purchases was adopted in 2005 as a measure of reducing corruption and government spending, and was amended in 2009 and 2010. This law “establishes the main principles of public procurement and regulates the relationships between government personnel and private sector actors taking part in the process.”

But since the law’s inception in 2005, government officials and businesses have found ways to bypass regulations, awarding contracts to certain firms and even embezzling initial payments without performing. Now the key players, along with a vigilant public fascinated and outraged by the waste, have engaged in heated debates regarding proposed amendments to the procurement law.

Not surprisingly, those in favor of the current law include “the entrepreneur community, bidding firms, and certain arms of the government” – those with an incentive to continue their corrupt rent-seeking practices at the expense of the entire Russian population. Meanwhile, opponents include “government and municipal clients and the majority of functional government departments.”

Dina V. Krylova (Business Perspective Foundation) and Alexander Settles (Higher School of Economics, Moscow) explore Russia’s procurement law, along with its revisions and proposed amendments, in their feature service article, “Procurement Reform in Russia: Implications for the Fight Against Corruption.”

In it they recognize the positive social goals achieved by the 94-FZ procurement law but also note the lack of further transparency reforms in the procurement process and the resulting negative effects.

Article-at-a-glance:

  • Corruption in the Russian procurement system, costing an estimated $35 billion in annual losses, has become the subject of sustained public scrutiny.
  • The 2005 Procurement Law improved many procurement practices but failed to address issues such as the quality of winning bidders’ performance and procurement officials’ undue influence over who wins public tenders.
  • Recent proposed amendments to the Procurement Law generated a heated debate on how the law should be further reformed in order to limit corruption.

Download the full article in PDF format.

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Posted in Eurasia

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The benevolent dictator myth

Posted on 8 July, 2011 | Comments Off

Although the concept of an economically benevolent dictator has increasingly gained popularity, the relative short-run success of an authoritarian regime has much more to do with the economics of growth, while its long-run performance is marked by inefficiency, poverty, and corruption.

The recent rapid economic growth of Asian nations such as China lead some to reconsider the belief that democracy is inherent, even necessary, for economic growth. Among the appeals of an authoritarian regime is the popular perception that a strong leader can act decisively and efficiently to reduce poverty and target problems in the economy, while a democracy might be hindered with indecision and competition.

But speed does not necessarily translate to solutions or growth, especially when made by an authoritarian government.

While an authoritarian government may be able to build and decide quickly, that does not ensure its actions and decisions are efficient, let alone optimal. In fact, these governments cannot match the efficiency of competitive free markets and price signals, and are riddled with misuse and misallocation of resources.

Authoritarian governments are plagued with rent-seeking bureaucracies and firms – groups that receive rents, or favors, from the government in exchange for kickbacks and political support. As economist Gordon Tullock demonstrates, these rent-seeking groups create massive dead-weight loss, draining the economy of wealth. While rent-seekers exist in democracies, they thrive in governments with unchecked power and extensive corruption.

A country can import knowledge and technology to accelerate growth for a time, but as it approaches what growth economists call “the technological frontier,” governments lose the ability to mask corruption’s effect on growth using imported technology and cheap labor, and GDP comes crashing down.

But the most important aspects are those that indicators such as GDP overlook: rights and liberties. In their struggles to remain in power, authoritarian rulers destroy rights such as the freedom of speech and assembly as part of desperate tactics to suppress the political opposition. Further intangible factors, such as environmental quality, are not accounted for in GDP figures. The environment’s impact transcends mere subjective preferences, affecting the health and quality of its inhabitants. Yet through weak property rights and authoritarian policies, pollution and resource depletion have become tangible problems for these regimes.

In this recent feature service article, Aleksandr Shkolnikov, Policy Reform Director at The Center for International Private Enterprise (CIPE), explains why short-term growth is not all it seems, emphasizing that “what matters is long term, sustainable development and the root sources of economic growth. For every China case you will find dozens of Zimbabwe cases; for every authoritarian economic miracle you will find dozens of economic failures.” He notes, “The history of sustainable economic development and prosperity clearly shows that it is not about strong leaders, but it is all about strong democratic institutions.”

Article-at-a-glance:

  • Rapid economic growth in some authoritarian countries has led many to believe that democracy is not necessary for prosperity and economic development.
  • Democratic governance, however, is essential for economic growth to be sustainable in the long term.
  • Strong democratic institutions, not strong leaders, are necessary for continued growth and investment.

Download the full Economic Reform Feature Service article.

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Posted in Global

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