Friday, May 12, 2006

Expropriation: a way NOT to build an economy

My note to all national leaders who have not had economics or finance classes.

It may be tempting. It may even look like a great idea: a way of making up for past injustices (real and imagined). But expropriation is almost never a good means of building an economy.

Why not? As Aguiar, Amador, and Gopinath write "...[the] threat of expropriation depresses investment, prolonging downturns."

What news spurs this economic truism? Bolivia is at it again. From Bloomberg:
"Bolivian President Evo Morales said he will extend his nationalization of private property to include agricultural estates and ruled out any compensation for oil companies whose assets the government took over May 1"
As the Austrian Foreign minister Ursala Plassnik added: "We need legal security and confidence because these are the core topics for investors."

Interestingly (think nexus of contracts), government officials may have incentives behind their apparent economic madness. In a World Bank 2002 working paper Keefer and Knack write that in the presence of "insecure property rights" firms may have an incentive to pay off politicians. ("Pay-off are my words not their's. They use: "Rent-seeking is best seen as that portion of predictable government taxes that are retained by government officials for their own uses.")

If lower foriegn investment was not enough reason to not threaten expropriation, Keefer and Knack also write that insecure property rights could lead to lower government investments as well.

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