Prosperous nations foster competition,
respect for rule of law

Carlos Alberto Montaner

Hugo Chávez is going to nationalize the steel mills and the big cement factories in Venezuela. Instead of creating a communist revolution, the Venezuelan president is buying it on the installment plan with his private river of petrodollars. He does not intend to stand the capitalists before a firing squad; he'll simply buy them out. He did it with the Caracas power plant and the telephone company, and he plans to do it again with every other important sector of the economy. Presidents Rafael Correa in Ecuador and Evo Morales in Bolivia are walking down the same road, each at his own pace.

A fair referee

These people are incapable of learning from the experience of others. In the world's 20 most prosperous societies, the entire productive apparatus lies within the private sector. Those countries are permanently stimulated by competition and governed by the rule of law. In that type of society, the role of the state is crystal-clear: It is not a player, but a fair referee and a stimulus factor that creates the conditions for the emergence of enterprises that are increasingly sophisticated and complex and add value to their production. How do those governments achieve those objectives? Through five basic steps:

• By generating a legal framework that attracts investors and fosters the survival of business enterprises.

• By perfecting the judiciary, so the inevitable conflicts that arise in the course of human relations may be rapidly and reasonably settled in accordance with the law.

• By encouraging the general development of education and health, so as to foster the availability of a robust human capital capable of sustaining an increasingly complex productive apparatus.

• By maintaining macroeconomic balances with a prudent fiscal and monetary policy.

• By outsourcing all services that can be performed by private industry. It is up to the government to decide which infrastructures need to be built or which services need to be instituted. However, experience teaches us that the most efficient and economic way to convert these needs into lasting works is to assign their execution, management and maintenance to enterprises within civilian society. Why? There are at least five reasons why the state is a lousy entrepreneur:

• The state is always more wasteful and inefficient. In general, public enterprises are huge nests of corruption. In the worst cases, venal politicians and functionaries pocket substantial slices of the budget. At best, they turn public enterprises into places where they can hire and reward friends and supporters, stuffing the payrolls with unnecessary workers.

• In public enterprises, it is impossible to establish formulas to stimulate good workers or punish the incompetent. Because nobody benefits from the results of the employees' labor, or is adversely affected by it, the bases of meritocracy are destroyed.

• Public enterprises are much more vulnerable than private enterprises when labor conflicts arise. In the public sector, to fire a slacker is an uphill struggle; to correct his indiscipline is just short of impossible. Because any confrontation between employer and employee has a political cost, public administrators are always inclined to give in, even in the face of the most unfair situations and demands.

• Private enterprise has positive and negative incentives to achieve the goals agreed to in contracts (bonuses, if the contractor does his work correctly; fines, which can lead to the loss of the concession, if the contractor disappoints the user), while the state lacks those mechanisms of reward or punishment. When a state is responsible for providing some service and does not achieve its objectives, or falls short of them, nobody seems to be responsible for the failures. However, if the services are entrusted to a private enterprise by means of a transparent and detailed contract, any noncompliance has a name and a face, as well as immediate negative consequences.

• If we start from the premise that one of the key objectives of every government is to stimulate the creation and maintenance of a thick and growing entrepreneurial fabric, one of the ways to achieve it is to outsource anything that can be accomplished within the private sector. This has an additional, very beneficial component: Part of the profits of the concession-holder returns to the public treasury in the form of taxes.

By now, we know how prosperity and collective progress are achieved. Chávez, Correa and Morales are going in the opposite direction. By taking the road they've chosen, they will lead their people deeper into the mire.

April 16, 2008

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