Wednesday, February 20, 2019

Venezuelan incentives

The collapse of Venezuela illustrates the power of incentives, albeit in a negative way.  When the daughter of the former president is one of the richest people in the country, it is a sign that the wrong activities are rewarded. From Tyler Cowen:

By boosting government spending so quickly, the Venezuelan government was sending a message that the key to future riches is courting government favor, not starting new businesses.

Particularly by nationalizing its major export industry, the Venezuelan experiment illustrates the attenuated incentives inherent in socialism:

[Exports]... bring in foreign exchange, provide contacts to foreign markets, and force parts of the economy to learn how to compete with the very best foreign companies. Yet over 90 percent of Venezuela’s exports are oil, and those resources are owned and controlled by the government. For this all-important growth driver, Venezuela comes pretty close to full socialism — to its detriment.

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