Author Archives: Tomas Mandl

Venezuela’s Institutional Matrix

Nobel Laureate Douglass North once said that, “if the institutional framework rewards piracy then piratical organizations will come into existence; and if the institutional framework rewards productive activities then organizations – firms – will come into existence to engage in productive activities.” Prof. North’s observation is proving to be awfully accurate in Venezuela.

The country’s recent bank scandals have exposed the internal workings of the so-called “boliburguesia” (boligarchs), a shady—piratical—network of businesses that thrives thanks to favors granted by the presidency. The boliburguesia’s plain and simple crony capitalism is even more regrettable in light of the government’s regular assaults on the market economy and its promotion of socialist practices.

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Business Creation or Business Operation?

The Kansas-based Kauffman Foundation recently presented a survey of U.S. company founders. Although the survey focuses on U.S. entrepreneurs, it provides some useful insights for entrepreneurs in developing countries.

Certainly, business creation plays a crucial role in boosting economic growth and productive employment anywhere in the world. In turn, many development experts have endorsed U.S. political economy institutions because they have shown to be a central foundation for entrepreneurship and innovation. For instance, Hernando de Soto based his reform of property rights in developing countries on the example of U.S. property rights institutions.

Nonetheless, the survey’s striking finding is that the main source of funding for first-venture businesses is company founders’ personal savings (70%). In other words, a large majority of U.S. entrepreneurs do not employ the formal financial market channels and rely on personal finances in order to start a business.

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Development takes time and perseverance

“Brazil takes off,” so proclaims The Economist this week. The British magazine concludes that Brazil is now officially a stable democracy with a dynamic market economy. No more jokes about how Brazil is the eternal “country of the future;” this time things are different.

However, The Economist warns about “hubris.” Certainly, regardless of the credibility of Brazil’s “entrance onto the world stage,” one lesson must be clear: development takes time and perseverance. The Brazilian example underscores a common trait of all newly developed countries and leading emerging markets, namely that good things don’t happen overnight.

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Argentina’s Shaky Freedom of the Press

Freedom of the press is an essential component of a genuine democracy. That is why Thomas Jefferson expressed that, “were it left to me to decide whether we should have a government without newspapers or newspapers without a government, I should not hesitate a moment to prefer the latter.” Indeed, one of the most powerful development messages is written in the U.S. constitution: “Congress shall make no law (…) prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press.”

Freedom of the press’ key contribution to democracy is its unique ability to restrain government power by increasing transparency, advancing accountability, and circulating diverse opinions. Autocratic governments understand this very well and try to constantly control the press. Where there are no unambiguous laws protecting freedom of the press, politicians of all stripes utilize ingenious schemes to control the media.

Argentina is a case in point, where freedom of the press is under constant threat by the state as a result of flimsy legal protections. In fact, the current government recently passed a new law that gives government the power to decide when a media company is too big and makes newspapers more dependent on government advertising.

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New Economic Thinking

George Soros wants to advance a “new economic thinking” and to that end he has pledged a persuasive $50 million grant. The money will fund the Institute for New Economic Thinking, a think-tank/research philanthropy that already boasts some impressive members on its advisory board. Soros maintains that, “The entire edifice of global financial markets has been erected on the false premise that markets can be left to their own devices, we must find a new paradigm and rebuild from the ground up.”

Soros as usual is being controversial and thought-provoking. In the first place, the idea that global markets are “an edifice” implies that it only takes some well-trained economic-architects to rebuild them. In other words, bring together some bright minds and they will be able to design the right foundations, choose lasting building materials, and pick cheerful paint colors. However, the question remains, who were the inept architects responsible for building the current flawed edifice and how exactly did they miscalculate?

On the other hand, Soros seems to be suggesting that the current economic crisis resulted solely from leaving markets to “their own devices.” Although it’s hard to see how a top-down public monetary monopoly connotes “markets,” few doubt that markets need good institutions to function. Nonetheless, even if economists can design the right “market devices”, there’s no guarantee that one size will fit all. That’s why is always good to keep in mind F. A. Hayek’s axiom, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

Haiti: Open for Business?

“Haiti is open for business,” said recently the country’s Prime Minister Michele Pierre-Louis. “We’re coming out of the paradigm of humanitarian help and brotherly love and moving to the creation of wealth and business,” added the Haitian Minister of Tourism Patrick Delatour. The leaders’ encouragement came on the heels of a momentous investor conference held in Haiti in early October, organized by the Inter-American Development Bank, and promoted by the United Nations Special Envoy to Haiti, former U.S. President Bill Clinton. However, potential profit-driven investors have to confront a newly implemented rise in the country’s minimum wage.

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Paul Romer’s “Charter Cities”

A key development challenge is finding the optimal mix of “top-down” and “bottom-up” institutions necessary for a given society to achieve sustained prosperity. Development experts know that some “top-down” institutions are indispensable to long-term prosperity but, at the same time, understand that “bottom-up” localized institutions are equally crucial. On the one hand, there are the basic “top-down” institutions that provide for the rule of law and uphold the kind of political stability that allows individuals to trade, invest, and eventually prosper. By far, these institutions are components of democratic regimes. However, China and the East-Asian “tigers” demonstrate that democratic institutions need not be perfect in order to sustain economic growth. On the other hand, development experts understand that different countries, regions, and cities may adopt “bottom-up” rules and institutions that are pro-development only if applied in their specific contexts.

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