Around 2011, Besley and Persson have published a book, where they present their own view on the factors behind evolution of state capacities of nations. I have struggled to understand the mechanics of the theory, because the models they present are full of corner solutions, Kuhn-Tucker stuff and jumps from an equation to equation without complete derivations (left as an exercise for a reader, apparently). Not like this is something new in economics but a little disturbing in any case.
Nonetheless, they have a plenty of reasonable thoughts, and I tend to agree with their considerations in general. Yet after trying to put myself in the shoes of a ruler (a German philosophy approach, right?), I believe I have found a (big?) miss in their theoretical construct. Since I tend to forget things more and more often these days, I found it necessary to write things on (e-)paper.
intel inside
The basic setup of their model features a society divided in two big chunks: a government ruled by elites and an opposition. Both of them struggle for power to extract rents. The stronger elites are constrained in their executive power, they greater is a piece of common (wealth) pie they share with their contenders.
The core part of the model rests on a presumption that elites extract their rents from taxes (whichever they are). The taxation itself, however, requires investments in a state capacity of a country. This seems as a reasonable assumption because if government wants to collect taxes, it needs bureaucracy capable of doing that, right? This feature of their model implies that elites get a stimulus to invest in public goods: to increase efficiency of public administration elites need to provide education to hire professional clerks for tax departments, find statisticians to keep track of things and “produce” software engineers to maintain databases for an efficient control in the future. Thus, it turns out that the greed for greater rents becomes a mechanism, which might lead nations to prosperity. Want to get greater rents? Fine, but please invest something that has public value to begin with.
But there is a little big problem with that. It’s called “Seniorage”.
Meet the seniorage
Technically, all current governments have an ability to increase supply of money at their will as long as government and a central bank exist in the first place. And those who learned macro-1 know by heart that seniorage is just another type of a tax. The tax, which is super easy to execute, and which works anywhere no matter how good your bureaucracy is. Just print money to buy government bonds and redistribute it they way you like.
Seniorage is a risky strategy, of course. Those, who have lived in high-inflation countries might object claiming that this strategy is suicidal because it is going to cause a social unrest. I believe, however, – based on some recent examples I mention below, that it is not as bad as one might think.
Doing a revolt is not an easy business with many prerequisites for a successful outcome. One needs leaders and united opposition to lead mass protest. One requires proper organization of protesting activity. One should be sure there are enough people ready to go risk their lives (or lives of their families) on the streets. Or in short, it is a problem of collective action, which are so hard to solve. Therefore, many ruling elites bet against it.
Some of them seem to win: look at experience of Mugabe in Zimbabwe or Ugo Chavez in Venezuela. The chances seem to be higher, if leaders are able to frame the reasons of the worsening living standards in a proper way. Usually, finding a suitable scapegoat is a good thing to do (United States foreign policy, evil capitalism, Zionism movements… the list is long!)
The bet becomes even better if one assumes that elites have an escape route to a foreign country and access to foreign assets. If we allow elites to save assets in foreign currency, they escape a problem of being taxed themselves by seniorage and the cookbook for irresponsible elites is ready. Here it is: a) finance your rents by seniorage, b) convert part of the rents into foreign assets/foreign currency, c) save some money to suppress opposition, d.i) repeat the steps a) to c) if the riot is not successful, d.ii) take a plane to a Miami beach just before angry people visit you at home.
Of course the price for that is to face a trial or being executed, but… just imagine the possible profits!
Does it mean that the theory of Besley and Persson is useless? Not necessarily. One can imagine leaders, which do not wish to go for seniorage by no means (Putin seems to be like that) or because elites value long-term security more than immediate income gains (Singapore under Lee Kuan Yew and his successors, maybe?) In these cases, the mechanisms Besley and Persson propose seem to be at place.
A big question, however, is: if the whole framework begins to rely on personal traits of elites, why do we need a complex theory with corner solutions for mechanisms, which are just the consequence of that instead of making a theory for value systems of elites?
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