0.9 Corrosion of institutions: rent-seeking  (Page 7/10)

• Cheating leads to an ineffective cartel
• OPEC –affects price thru supply restrictions
• However, the history of OPEC since 1970 shows many examples of cheating (not sticking to output restrictions).
• And it is, of course, true that supply restrictions are pervasive in LDC ^s .
• Governments often confer monopoly privileges on certain producers. (Tires, beer, auto, etc.). Indonesia, Zabia etc.

Rent-seeking and the greek drama

A simple fact: Greece cannot afford the standard of living it enjoyed before 2010. There is but one important industry: tourism. Greece in an economic vise now for 4 reasons:

1. Very generous social benefits granted by government, such as 35 hour weeks, retirement at 56 years, special bonuses each year to public workers (over monthly salary)
2. Greece cannot begin to collect the taxes they have on the books.
   High tax rates
   Low collection, much tax evasion (Perhaps 50%)
   So, Greece is unable to pay for its large government expenses
3. Very low growth since 2004. With low growth, few new jobs. Youth unemployment in 2013 was 50%. There is lower tax revenue, higher deficits, and growing national debt.
4. An extensive, stifling system of licensing, to enter business, to start tax companies etc. Greece has been experiencing what Gulliver endured at the hands of the Lilliputians. Swift, Jonathan, Gulliver’s Travels , Ireland: Benjamin Motte, 1726.

But Greece is not tied down by wires, but by the cumulative efforts of decades of rent-seeking behavior.

Fourth Factor

Licenses are the fourth thing strangling the economy. To limit competition and benefit rent-seekers, Greeks have imposed stiff, onerous licensing requirements on almost every sector. You can hardly find a business or occupation to enter without first getting a license. If indeed government will grant you one.

And often they do not. To illustrate: trucking firms need a license to enter business of hauling freight etc. When was last license issued? Nuff said ( 1971 ).

The European Union imposed touch austerity measures on Greece in 2011-12, to reduce high deficits and growing national debt. But austerity has not led to economic growth. Economic growth remains curtailed by the suffocating effects of the licensing system.

In the U.S. in 1970s because of President Nixon’s oil price controls we had oil entitlement program for refineries, this drove up the price of fuels. Some refineries existed only because of the existence of oil price control. Competition for favors dispensed by government is rational . It makes good sense for rent-seekers because the potential rewards are large.

Just how valuable are these favors to those who receive them? Consider again U.S. entitlement program in oil - $75 billion went to 80 refineries in 1980. Consider another typical case: Indonesia in 1990s. Before then, Indonesia imported polystyrene used in the manufacture of various plastic products. Then in 1994, a new local plant began making polystyrene. I nitially they received a very low protective tariff of 5%, employed 115 workers (“infant industry” argument was used). This is the way protection usually begins.