Chavismo's political agency problem

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adquerir1Turn on the TV, and it strikes you in the face – the stratospheric stupidity of the people in charge in Venezuela. Whether it’s Nicolás Maduro talking about how soap operas create violence, or Eudomar Tovar struggling with simple graphs, the question that begs asking is: why do we have such mediocre statesmen? How did we end up with people who so openly disdain knowledge?

Turns out – there’s a scientific explanation for it!

In a provocative new paper by Brollo et al. (2013), published in the American Economic Review, the authors blame our old foe the resource curse. The authors claim that resource curses increase observed corruption and reduce the average education of candidates for political office.

In other words, resource windfalls create a “political agency” problem, whereby the pool of possible candidates for powerful positions becomes crowded with pestilent characters of unseemly reputation who somehow always end up winning.

Agency problems are common in economics and politics. The basic framework of the agency problem is as follows: in many relationships there is a principal (the main staeholder) and an agent in charge of executing the principal’s wishes). Sometimes, what the principal wants to get out of the relationship does not coincide with what the agent wants.

This is common in companies. Think of the principal as the shareholders of the company. They want to maximize the value of the company’s stock. The agent is the general manager, but he might be more interested in maximizing the company’s growth, because that way he gets his face splashed all over the papers. Since the principals don’t observe the details of all the actions taken by the agent – what economists term “asymmetric information” – the agent can get away with doing something slightly different than what the principals want. Solving the agency problem is a key challenge of all organizations.

According to Brollo et al., a resource windfall means that there are high rewards for politicians to grab their share of the pie without sacrificing basic services for people, i.e., you can get away with corruption more easily. Because corruption is more freely available, more people who are solely interested in corruption will enter the pool of possible candidates, and somehow get themselves elected.

In technical terms:

The model highlights several political effects of an increase in non-tax government revenues. First, there is an effect on moral hazard: with a larger budget size, the incumbent has more room to grab political rents without disappointing rational but imperfectly informed voters. In other words, the electoral punishment of corruption decreases with budget size, and this induces the incumbent to misbehave more frequently. Second, there is a selection effect: a larger budget induces a decline in the average ability of the pool of individuals entering politics. This is a by-product of the first result (that rents increase with budget size) and of the assumption that political rents are more valuable for political candidates of lower ability. The selection effect in turn magnifies the adverse consequences on moral hazard: an incumbent facing less able opponents can marginally grab more rents without hurting his reelection prospects. As a result, and despite the increased level of corruption, in equilibrium a windfall of government revenues also increases the reelection probability of the incumbent.

They tested this hypothesis on a set of Brazilian municipalities that received a resource windfall:

“Specifically, an (exogenous) increase in federal transfers by 10 percent raises the incidence of a broad measure of corruption by 4.7 percentage points (about 6 percent with respect to the average incidence), and the incidence of a more restrictive measure—including only severe violation episodes—by 7.3 percentage points (about 16 percent). At the same time, larger transfers by 10 percent worsen the quality of the political candidates challenging the incumbent, decreasing the fraction of opponents with at least a college degree by 2.7 percentage points (about 6 percent). As a result, an incumbent receiving larger transfers experiences a raise in his probability of reelection by 4 percentage points (about 7 percent).”

Yet one more thing we can blame oil for…

1 COMMENT

  1. I am going to use this article a lot in the near term future. But for right now I am so stealing this snipet:

    crowded with pestilent characters of unseemly reputation

    Good writing is always worth stealing.

  2. I believe that this is just more fuel for extorrres and his position that the oil wealth be distributed through UCTs (or my preference, CCTs).

    I would also suspect that as the quality of the pool declines, if there is an above-average incumbent or candidate (not necessarily educated, but more industrious, charismatic, disciplined or focused than others) the corrosion in available talent across the board would, as a natural consequence, facilitate consolidation of power once in office and giving rise to dictatorships.

    Taking the data sets from the WJP study, when you assign the countries a score on the basis of extractive economies versus trade/industrial economies (literally, 1-10 based on how much of trade is based on export of oil/minerals (example, Venezuela’s 95% oil reliance = 9.5) versus industrial production, the scores are pretty in line with what you’d expect: low scores negatively correlate for the degree of extractive economies with higher scores for industrial/consumer/service economies. (With notable outliers such as Norway and to some extent, Canada)

    Likewise, assigning scores (using the EIU’s Democracy Index) based on authoritarianism/dictatorships on one end of the scale (low -such as Iran and Uzbekistan) to liberal democracies (high such as Sweden and Norway), unsurprisingly has a positive correlation to scoring in the WJP. The interesting part here is regress the data, and then plot the predicted scores against the actual, there are a few obvious outliers, one of which is Venezuela. The EIU claims it is a high scoring hybrid (5.6), but compared to the WJP data, the score should be much lower.

    Granted. Arbitrariness is in my nature, but I do love playing with data sets.

    • Regarding Norway: lots of people, even Norwegians, forget Norway was not that poor before. It was poorer than neighbouring countries, but not that much.
      Education was top already over 200 centuries ago, having free (or tax-financed, as you like) education for centuries. Regarding land possession: it was the absolute opposite to Venezuela. In fact: it was one of the regions less affected by the land ownership relationships of feudal times in most of Europe. Remember: Venezuela is still a feudal land and although 98% of the population has nothing to do with agriculture, probably over half of them live in households without land property.

      Norway already had pretty good mathematicians and engineers in the XIX century and got two Nobel prize winners in chemistry and one in physics just at the moment when its oil era started (obviously, for work preceding oil discoveries).
      Take that into account and you can see it is not so amazing Norway did so well beginning at the time CAP became president for the first time.

    • pitiyanqui, fuel indeed. Vulture guarding meat; we must take the resource monies out of the reach of those in power. By making it difficult to reach from government, the crooks will want to be in government less…

  3. Somehow I didn’t need a paper to understand that the 100 $ dollar price is the thing that sustains a political movement in power for 14 years under the economic direction of a person like Jorge Giordani. (And that’s the reason I think that, in the typical dutch disease cycle, the incompetent will fall with a sharp decline the price of oil)

  4. Which means that in this setting, winning elections have nothing to do with the overall ability of polical candidates, otherwise all the rest of things equeal, high-ability candidates will enter the pool of electable people and beat the crap out of those uneducated crooks that entered politics only to grab rents…which we all know is empirically tested not true

    • I think that if a high ability candidate enters the pool, he is simply more likely to achieve capture of those rents rather than be altruistic. Said candidate is also more likely to erode institutions and undermine previous polities in pursuit of his/her own self-interests. From the non-entities emerges a champion in some eyes and a dictator in others.

      Of course, this is also wholly based on empirical evidence.

  5. Now THIS is interesting. Now, will politicians actually use this information to form governments that attract and sustain the most qualified leaders? Doubt it…

  6. Surprising, but can this be regarded as particular to countries with already weak institutions?

    By the way just for the record the pub date on the working paper you link to is 2010. I assume that is not the final published version.

    Recommend reading Nocera’s opinion column today on the new york times, his optimistic take on government largesse in brazil is another eye opener. Would be nice to see more serious opinion from such a source.

  7. Because the mediocre statemen are just here for the circus while the situation room in Havana decides our future. They are boring and mediocre so they keep us hipnotized in a stupor.

  8. I disagree with the idea that most pols are primarily motivated by the rewards that financial corruption grants high govt officials . their primary motivation is the exquisite feeling of agrandized pride that power grants those who gain and hold high office by playing on their capacity to attract popular support by personal acts of theatrical protagonism . This itself reflects a culture that worships super men of heroic moral and cesarian stature as rulers rather than men who are simply superbly competent at managing resources and organizations for the maximum benefit of those under its rule . People dont value competence or organizational or managerial talent , the capacity to make big things function well , they prize instead the warrior or saint that engages in epic acts of political heroism because of his noble shining ideals .
    They want a convincing showman rather than a competent and efficient ruler . In politics Popularity is everything and popularity is more easily gained through grandstanding theatrics than through feats of good governance , though the corruption of widespread clientelism than by having people strive hard to make themselves productive and thus acquire a better life .
    Only in mandarin China was academic competence politically rewarded ( they chose rulers on the basis of hugely difficult tests on the Confucian Classics held every three years ) and public careers made on the basis of good meritocratic performance. For five centuries China flowered under Mandarin rule . The Emperor was there to be worshiped but day to day governance was delegated on a caste of meritocratic officials . Now China with variable success is attempting to return to that old Mandarin idea , even if corruption still exists and there is no democratic haven, China rewards the best of its officials with promotion to higher responsability . Communism is no longer relevant , although still kept on to distract the masses and make believe that there are still Gods to be worshiped but basically they are ruled by the idea that only the best tried officials are to climb the power of political power until they reach the top where they are kept for ten years and then let go.
    The object of mandarin rule is to expand as much as possible the welfare and quality of life of the governed , not winning the next popular election !!
    The purpose of power is power itself as Orwell proclaimed , huge public wealth just helps make the power hungry make a corrupt use of that wealth to keep itself in power and boost its own power as much as possible . !! whatever the ultimate consequence for those it rules. !

  9. As I found it in portuguese, I will write it as is

    Ineptocracia: um sistema de governo onde os menos capazes para liderar são eleitos pelos menos capazes de produzir, e onde os membros da sociedade menos capazes de se sustentarem o de terem sucesso são recompensados com bens e serviços pagos pelo confisco da riqueza de um número decrescente de produtores.

    So, we are in one…

  10. So, at a money piñata, people who all they want is money are more likely to show up and find a way in to the party? No surprise there.

  11. So, if we had some good governments prior to 1998 -which I would say we did, at least during sinc 1936- was not because of oil, but despite oil.

    Moreover, and I’ve observed this in an upcoming work, it was rent-seeking actors who accepted democracy’s bargain at a cost, imposing ever increasing demands for themselves and taxing the system. They provoked corruption, while the system accepted it as the cost of doing business (i.e., having a pluralist system). The system breakdowns during the 1936-1998 period came from a) new elites wanting to divert rent into new areas and redistributing it (which became akin with the right to vote) (1945); b) old elites demanding a stop to redistribution, and faring it became out of hand (1948, 2002?); c) an alliance of old elites considering that a political hegmony regarding rent distribution was not good for anybody’s business, so the re-grantes power to a retooled version of the new elites (1958); and d) the fracture of the old elites, which decided to forego the unpopular trustees (the once-but-not-quite-new-anymore elites), and chose new and even more popular ones (1998). Outcast or aspiring elites also had bids for total power in the 1960s and in 1992 (from the left), and the 70s-90s (from variations of the liberal or technocratic right).

    By old elites I mean the traditional military stablishment, the Church (at least until the 1950s, but this a bit complex), landowners, financiers and importers. Modern political parties, aspiring industrialists, etc. would be the new elites.

    • GT with all respect but although your comment above sounds very interesting, the wording is a bit difficult for me to follow, could you please write it a bit differently so that we can all profit from understanding what you are thinking . It sometimes happens to me too that there are so many thoughts running through my mind that they outpace my fingers and I end up writing something which is not altogether legible .

    • I agree with bill. Your premise seems interesting, but it’s a bit hard to follow.

      I think just naming the people/factions/parties would improve readability (as opposed to referring to them as old elite, not so old elite, new elite, etc).

  12. Well they put it in policy making terms, corporate governance issues, etc…We already knew that…Even Romulo Betancourt when it was presented with the nationalization plan, as the president of Acción Democrática–> “Este país se jodió”)

  13. The obvious point (to me) is that a resource bonanza allows incompetent and corrupt politicians to satisfy the public in spite of their failings. At this point, competence and honesty matter less than electoral talent.

    The election process then selects those who are most successful in that process even when they are good for nothing else.

    There are parallels to this: people who repeatedly talk their way into jobs they can’t do.

    Or consider the inverse: when conditions are really bad, a community will demand scapegoats, and often pick on those who are outcasts for whatever reason.

    • Resource bonanza doenst make bad people enter politics , For them the rewards of holding public office , large or small are always there , what it does is allow structurally dysfunctional regimes, regimes that dont know how to make things work and deserve to be replaced paper over or cover up their failures so that they can retain enough popularity to keep themselves in power .Any concentration of wealth ( and of power) which can be got at through demagoguery will attract corrupt people ( including power mad megalomaniacs) . Functionally mediochre or Structurally dysfunctional institutions or cultures are not changed simply because they come to be headed by good well intentioned people because the latter too often lack organizational, planning or managerial talents . Lofty character and highly moral ideals dont make a man good at making things work well . Even if they are functionally competent his efforts can come to nothing if down below those in direct charge of day to day matters are poor organizers , managers or worse still , given to corrupt habits. Too often in latin america we prize the lofty ideals and character of a leader and his promises rather than his capacity to organize and manage things to function well at an institutional and practical level. This is the source of many of our problems, an inability in ordinary people to tell when someone knows how to do things efficiently and well and their tendency to confuse grand personal qualitiess ( true or aptly feigned) with the promise of good governance. Good people can make very bad govts and sometimes people who are not as good but who are competent can do a better job at fulfilling the basic tasks of government .

  14. I have a friend living in Margarita now, and this guy has been trying to get selected within his party to run for public election for the last 14 years! I honestly thought he had indeed a real public service will, having rejected several opportunities to leave the country before. BUT chatting with him last August I asked him specifically why he was so persistent with this political thing, and smiling he just said: “I just want to get elected or not even elected but you know… being there as one of the mayor’s people and then I can start a new company to run some service contracts and well… make enough money to leave the country and never be back”. (!!) so there it is 14 years spent chasing the dream of: ponganme donde haya.

  15. OT: Chavismo detracts the 171 emergency service.

    First, we learned that Mónica Spear called 171 while stuck on the Puerto Cabello highway. The call operator told her there were no cranes or ambulances. No police units were dispatched either.

    Instead of revamping the emergency service in Carabobo, to prevent other people from having the same fate, it was reported that the Carabobo Governor had those operators being fired. And then reports denying that any firings had taken place.

    I’ve yet to read of any politician calling to revamp any of the regional emergency services. Thus preserving the public perception that the measures to take to solve this mess are exclusively police related.

    What I did read is that the Bolivar Governor decreed that the emergency service in Guayana will now be taking calls regarding street vendors selling regulated food items.

  16. Ramírez quote of the day (after explaining the only students, pensions, diplomatic expenses and special cases will have access to the VEF 6,30 dollar; while the rest will go to SICAD at more than VEF 11):

    “Yo no voy a caer en el debate de si existe una devaluación o no, no voy a caer en chantajes”

    “I’m not going to debate whether there’s a devaluation or not, I’m not going to fall for that”

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