Monday, August 2, 2010

What causes the wealth and poverty of nations?

Italy provides a fascinating case study. The country has an almost pathological fear of competition, and uses government enforced laws to prevent it.
...Cabs are relatively scarce in Milan, especially at 5 a.m., when [an econ professor] wanted to head to the airport, so he called a company at 4:30 to schedule a pickup. But when he climbed into the cab half an hour later, he discovered that the meter had been running for more than 20 minutes, because the taxi driver had arrived soon after the call and started charging for his time. Allowed by the rules, but to Mr. Giavazzi, utterly unfair.

“So it was 20 euros before we started the trip to the airport,” recalls Mr. Giavazzi, who is an economics professor at Bocconi University. “I said, ‘This is impossible.’ ”
After Professor Giavazzi later wrote an op-ed article, the taxi guild organized protests that had taxis driving around his house, honking their horns at night.  These guilds drive up costs throughout the economy:
“This is a country with a lot of rents,” says Professor Giavazzi, sitting in his office one recent afternoon, using the economists’ term for excess profits that flow to a business because of a lack of competition. “You need a notary public, it’s like 1,000 euros before you even open your mouth. If you’re a notary public in this country, you live like a king.”
THE protectionist impulses of the guilds are mimicked throughout the Italian labor market. The rules are different for small companies, but in effect, people with a full-time job in a company with more than 18 workers have what amounts to tenure, even if they don’t belong to a union. This makes managers reluctant to hire, especially in a downturn. You are stuck with new employees in perpetuity, whether they’re good or not. 

So how does the country survive?  By evading the taxes and regulations.  Economists estimate that 25% of the economy is in the so called "black market."

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