My wife and I had an opportunity to travel abroad twice this year. Our initial trip was to the northern wine-producing regions of Spain. Our next adventure was to Armenia (where my wife’s family is from) and Italy (Rome). As someone interested in personal finance and economics, I observed and asked questions of many of those we came into contact with along the way. The impressions I came away with underscore the importance of understanding the impact of natural and perverse incentives within economics.
La Economía de España
When we were in Spain, I asked many people about the economy and very few (really no one, save a guide we had on our final day there) could express in any rational way what was driving the economy. Mostly, they answered with a description of their personal economics, normally with a good dose of dislike for those in power and acknowledgement of the corruption throughout all spheres of government. Spain has a huge underground or black market economy and many of those who officially are unemployed actually perform work for pay “off the books” in order to avoid taxes. No big surprise there.
Economic Lessons Learned in Armenia
Armenia is a very interesting country with yet another set of economic lessons. The main city of Yerevan has a population above 1 million and is almost 3,000 years old. In many economic respects, however, it is in its infancy as Armenia declared independence from the former Soviet Union just 22 years ago. The infrastructure and economic underpinnings are having to be re-built after decades of Soviet rule. Expectations; risk taking; innovation are having to be re-created, almost from scratch.
Since Armenia is just one generation removed from communist rule, corruption is still prevalent in many sectors. We had a chance to talk with a wonderful Armenian gentleman who was driving us to see some sites outside of Yerevan. He described his educational background and indicated that because of corruption and nepotism, he had been unable to find work in his chosen field. Armenia is a justifiably proud country that has overcome almost unbelievable obstacles. Developing a working and growing economy may take some time.
“Rent Seeking” – An Unhealthy Development
Oppressive economic systems (like the former Soviet Union), replace “profit seeking” with “rent seeking” (economic “rents” received from manipulation of the political or social apparatus). Adam Smith defined the 3 fold economic benefits as profits, wages and rents. Economist Anne Krueger coined the modern-day usage of the phrase “rent seeking” in 1974 to describe the pervasive effects of sugar subsidies. The most important element to understand about “rent seeking”, is that it deprives economies of value creation. We see many examples of “rent seeking” within our own economy today, and that is not a healthy development. Both incentives and dis-incentives work. My recent travels provide ample evidence of this truth.