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Chile

Progress and its discontents

A popular student rebellion shows that, as Chileans become better off, they want the government to guarantee a fairer society. Politicians are struggling to respond

Apr 14th 2012
SANTIAGO

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IN A ritual marking the start of the academic year, last month the streets of Santiago were full of students dressed in colourful combinations of rags and body paint politely seeking donations from passers-by in the late-summer sunshine. Many of their predecessors had spent their summer holidays swotting, having devoted last year to occupying classrooms and taking to the streets in their tens and hundreds of thousands, in sometimes violent demonstrations to demand free and better higher education. This mass popular protest, and the huge public sympathy it aroused, took the centre-right government of Sebastián Piñera by surprise, leaving it floundering.



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The habit of protest seems to be catching on. Thousands of residents of Aysén, a remote region in Patagonia, have blocked roads to demand cheaper petrol and in protest over a new fishing law. Similar regional protests have occurred in Calama, a mining area in the northern desert, and (last year) in Punta Arenas.
Such protests have been commonplace for years in Peru, a poorer and more diverse country. But Chile? In the two decades since General Augusto Pinochet’s dictatorship gave way to democracy, Chile has stood out in Latin America for its rapid growth, social progress, political stability and relatively robust institutions. Now Chile’s political leaders are wondering if they are seeing a popular rebellion against “the model”, as some call the free-market policies bequeathed by Pinochet and left largely intact by his successors.



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Two years ago Mr Piñera, a billionaire businessman, led the centre-right Alliance to power after two decades of rule by the centre-left Concertación coalition. When his government organised a successful rescue of 33 trapped miners in October 2010, his approval rating soared to 63%, says Adimark, a pollster. Thanks mostly to the students, it is now just 29%.



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Part of the problem is that Mr Piñera has proved to be an inept politician—a view not confined to the opposition. The government was slow to respond to the student protests. The president zigzagged between talking tough and giving in, undercutting his ministers in the process. The latest casualty was the energy minister, who resigned over the mishandling of the Aysén protest. The public dislikes Mr Piñera’s arrogance. “He has convinced Chileans that he’s very intelligent, but he hasn’t convinced them he has a heart,” says Arturo Fontaine of the Centre for Public Studies (CEP), a liberal think-tank.



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But the public is equally dismissive of the Concertación. At just 21%, its approval rating is even lower than the governing Alliance (24%), according to Adimark. Rather, the emblematic figure of Chile’s year of discontent is Camila Vallejo, a 23-year-old Communist student leader. Having been an irrelevance on the margin of Chile’s two-party system, the Communist Party enjoysmore influence than at any time in the past 20 years,” says Guillermo Teillier, its president.


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What makes this collapse of public confidence in the system odder is that in many ways Chile continues to thrive. The economy is growing by 6% a year, and with virtually full employment, wages are rising equally fast. The government has done a reasonable job of reconstruction after a severe earthquake two years ago.


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Less poor, still unequal
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.In opinion polls the students’ demands enjoy the support of 70% of respondents, even if their sometimes disorderly methods attract the disapproval of a narrow majority. The student movement has struck a chord in a society that is increasingly middle-class but remains highly unequal. Only 15% lived below the poverty line in 2009, down from 45% in the mid-1980s. But the distribution of income in Chile is the most unequal in the OECD, a group of 31 mainly rich countries that it joined in 2010. Taxes and government transfers do little to reduce inequality (see chart 1). The education system has locked in social inequality rather than breaking it down.


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Chile has made a big effort to increase access to education, partly by allowing private entities to run schools and universities. Politicians from both main coalitions repeat the numbers with pride: over 1.1m young people now study in universities or technical colleges, up from just 200,000 in 1990. That amounts to around 45% of 18-24 year olds. Over 70% of these students are the first generation in their families to go on to higher education. All in, Chile spends around 7% of GDP on educationabove the OECD average, though its population is younger. But more than a third of the spending is private. Many Chileans find they are paying a lot for an uncertain return.



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All universities, both private and public, rely on student tuition fees, which account for 80% of spending on higher education, according to Carlos Peña, the rector of Diego Portales University. Fees range from $700-1,000 a month at the top universities, down to around $70 a month for a two-year vocational course at DUOC, a non-profit technical college linked to the Catholic University.


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But fees at most universities cluster at the upper end, irrespective of quality. And on average, they have been rising by 3-4% a year in real terms in the past 15 years, notes Harald Beyer, an academic who in January became Mr Piñera’s third (“and I hope last”) education minister. To make matters worse, the average university course lasts six years and four months, compared with an OECD average of four years and four months, according to Mr Beyer.


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Although around 60% of students get grants or government-backed loans, these cover only 70-80% of fees. Loans at “traditionaluniversities—a group of 25 public and private non-profit institutionscarry an interest rate of just 2% a year. But the interest rate on state-guaranteed bank loans to students at newer private universities, introduced in 2006, was fixed at 5.8%. Many poorer families find that they can achieve their dream of educating their children only by taking on large debts.



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Many students arrive with the idea that they will derive the same advantages that universities offered when they catered for only a small minority. That is no longer true. As the number of educated Chileans rises, the premium they command in the labour market falls. (This is why income inequality in Chile has been falling a bit.) Employers give more weight to degrees from the top universities. In addition, drop-out rates are high. Those who drop out have accumulated debts but will be little better off than if they had gone straight into the labour market after school, according to a CEP paper by Sergio Urzúa, an economist at the University of Maryland. Mr Urzúa estimates that 39% of those who do graduate will find that their salaries do not compensate for the cost of their courses. As Andrés Velasco, a former finance minister, puts it, “the combination of lower-than-expected income and higher-than-expected debt is explosive.”



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Poorer students are more likely to drop out, and less likely to get into the poshest university courses. That is because they go to worse schools. Thus at DUOC, where three-quarters of students come from the poorest three-fifths of society, about 35% drop out, either for economic reasons or because they find the courses too hard, according to Jaime Alcalde, the rector. “Students arrive without being able to do basic arithmetic or with weak language skills,” he says. About a quarter of each course at DUOC involves remedial classes in maths, language and English.


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DUOC has a good reputation for achieving upward mobility: within six months, nine out of ten graduates are working in their area of specialisation, for salaries ranging from $1,150 to $2,450 a month, says Mr Alcalde. That may be why few of its students joined the protests.




But many other institutions offer much worse value. “In Chile there are good universities for the rich and bad universities for the poor,” complains Camilo Ballesteros, president of the students’ union at the University of Santiago last year and now the Communist candidate for mayor in one of the capital’s student districts. He wantsfree high-quality universities for all”. The student movement also wants the national government to take over municipal schools and to abolish for-profit state-subsidised schools. Universities are barred by law from making profits, but some find loopholes, such as when their owners set up property companies that charge high rents for their campuses..

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Camila Vallejo leads the revolution

.Fair, not free


“We’re not going to yield to demagogic demands,” says Andrés Chadwick, who is Mr Piñera’s cabinet secretary (and first cousin). Free education doesn’t seem fair to us, because those in higher education still tend to be the better-off.”



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Instead, the government wants to make higher education cheaper and better, in several ways. It has sent a bill to Congress to equalise the interest rate on all student loans at 2% a year. That this has not been swiftly approved suggests that the traditional universities are quietly lobbying against it. Another bill would set up a regulator whose job would be to enforce the law barring universities making profits. The government has also announced a modest rise in state-funded student grants, and it is mulling a law to reform university governance.



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Some in the opposition want to see a cap on fees. But that risks hurting quality. Mr Urzúa argues that the biggest problem is the lack of information students have when choosing their course about the cost and the likely economic return.

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But most of the government’s efforts are directed at improving schools. Mr Beyer points out that, by the time they are ten years old, pupils’ performance already varies sharply with household income. That is partly because less than half of Chilean children receive any pre-school education. But it is also because the poor go to worse schools.



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Pinochet left a voucher system in which the government runs no schools itself, but instead pays a fixed fee per pupil. But while private schools ask parents for top-up fees, most municipal schools do not. The Concertación government of Michelle Bachelet (2006-10) raised the voucher to $100 per pupil each month, and added an extra $50 for poorer children. But Mr Velasco, who was Ms Bachelet’s finance minister, says the voucher needs to double if poorer children are not to lose out.


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Perhaps the most pressing need in Chile’s schools is a radical shake-up of the teaching profession. Because teachers are mediocre, even the poshest private schools in Santiago are no better than an average state school in London or New York. Mr Piñera’s government has made a start: a 2010 law gave head teachers more power to hire and fire. Missing is a grand bargain in which higher salaries would attract brighter graduates into better teacher-training programmes and then make them accountable to parents for their schools’ performance.


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Mr Beyer points to a poll showing support for free higher education falling from 80% to 45% over the past year as evidence that the government is starting to win the argument. But it may be losing the wider propaganda war. Roberto Méndez of Adimark says that, for the first time in 30 years, “trust in the liberal economic model has weakened”, from 60% to 40%. That may be because the student movement has crystallised a widespread feeling that the economy, politics and the media are all rigged in favour of a small elite.


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Collusion and cartels

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Partly because Chile is a fairly small, remote country, its economy is riddled with oligopolies. For example, just three chains of pharmacies control 90% of the market. In January, the competition authority found that they had colluded to push up the price of more than 200 medicines by around half.


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The authority has also fined bus companies for collusion. It is now investigating an alleged chicken cartel. Retailers get away with usurious interest rates on store cards. This came to light last year when La Polar, a retail chain, was found to be fraudulently covering up loan losses by jacking up interest rates without telling customers. Several senior politicians from both main coalitions are shareholders in for-profit universitiessorry, property companies—in covert defiance of the law. The private health insurers and pension funds that Chileans are required by law to use also extract large profits.


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The tax system similarly favours the better-off, though it has also proved effective at promoting private savings and investment. Corporate income is taxed at 18.5%; shareholders receiving dividends can set this against their personal income tax. Since the top rate of personal income tax is 40%, high earners shield their income by creating shell companies. The government is planning a tax reform that would raise the corporate income tax to 20%, while cutting tax rates on personal incomes and for small businesses, as well as cutting a stamp tax on credit. The reform will raise around $700m (or 0.3% of GDP), to be spent on education, says Felipe Larraín, the finance minister.
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Is this enough? Unlike some other left-of-centre governments in Latin America, the Concertación was a model of fiscal responsibility. It raised social spending, but entrenched a fiscal rule that requires the government to balance its books over the economic cycle and to save windfall profits when the price of copperChile’s main export—is high, as it is now. Alejandro Foxley, finance minister in the first Concertación government, says that the state needs to raise an extra 2-3% of GDP in taxes to satisfy the public demand for better education, infrastructure and institutions (see chart 2).



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Mr Larraín disagrees. He says that Chile’s total tax take of 21.3% of GDP is about right for a country of its income level once spending on social security, which is privatised, is taken into account.


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But the governing Alliance is divided. Pointing to the sense of neglect in far-flung regions such as Aysén, Lawrence Golborne, the minister of public works and a likely presidential candidate in 2013, says that public spending on infrastructure needs to double from its current level of 1% of GDP. The Independent Democratic Union (UDI), the larger and more conservative member of Mr Piñera’s coalition, has long favoured a small state. But it now has a populist wing that wants to cut taxes while also doling out additional subsidies.


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The debate about public spending will dominate the 2013 presidential election. But even more important are reforms to promote competition and raise productivity. Without them, growth may slow and Chile will remain overly dependent on copper.


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Reforms often stall in Congress because the vested interests they hurt are often big political donors, points out Eduardo Engel, an economist at Yale and the University of Chile. It took a decade to overcome lobbying from incumbents and approve a law allowing consumers to keep their phone numbers if they switched telecoms providers, for example.



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Indeed, the most unpopular oligopoly in Chile may be the two-party system that has given the country stability. It is propped up by an electoral system of two-member constituencies, devised by Pinochet as one of several measures to ensure that the right, then a minority, would maintain a veto over change.



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Its critics say that this has had the effect of turning political office into a sinecure, which in turn risks creating a gerontocracy. The president has offered to reform the electoral system if there is consensus about an alternative, but ministers acknowledge that the Congress, in which the government lacks an overall majority, has no appetite to change the rules under which it was elected.


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It is almost a truism that the student movement marks a generational change in Chile. The student leaders were born as their parents were voting in the plebiscite that ended Pinochet’s rule. They do not share their parents’ fears. They have grown up in a society used to material progress. They have bypassed Chile’s generally conservative media with their own means of communication. Fernando García, a political scientist at Diego Portales, points out that Chile has the fourth-highest usage of Twitter per person in the world, with almost 30% of the population tweeting. Eight out of ten Chileans under 30 are on Facebook and there are more cellphones than people, “so the cost of mobilisation is zero,” says Francisco Díaz, a former adviser to Ms Bachelet.



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Fatigue may yet diminish the intensity of the protests later this year, but student leaders now talk of a broader movement drawing in regional protests. Some political analysts worry that the current crop of relatively pragmatic student leaders will be replaced by yet more radical ones.



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Many believe that Ms Vallejo (who declined requests for an interview) has a bright political future. But that may be despite her affiliation with the Communist Party, not because of it. Mr Teillier says his party and its allies command no more than 10% of the vote. He sees the possibility of a single opposition platform for municipal elections in October. Indeed, in the short term the student movement may have even greater impact on the Concertación than it has on the government.


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After its leaders were jeered when they tried to join the protest marches, the Concertación sheepishly adopted the movement’s main demands. It risks being pulled farther to the left than the country as a whole.



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Mr Peña, the rector of Diego Portales, says that popular support for the student movement is “not really a radical rebellion against the market economy”. Rather, it is the consequence of a “gigantic revolution of expectations”. It is also a sign that Chilean society has changed faster than its elites and its political system. The politicians have been warned.

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April 12, 2012 7:15 pm

Mexico steps out of Brazil’s shadow





I once asked Carlos Slim why Mexicans were so down about their country and Brazilians so euphoric about theirs. The world’s richest man, whose biggest investments span both countries, replied: “It’s simple. They are Brazilians. We are Mexicans.”


It was a perceptive comment. Many Mexicans feel depressed about their country, and the world has shared their gloom. Meanwhile, the confidence of Brazil’s boom – on show during President Dilma Rousseff’s visit to Washington this week – has gripped the popular imagination. The latest manifestation is the imminent $20bn stock market listing of BTG Pactual, the Brazilian investment bank that wants to be, of all things, a “tropical Goldman Sachs”. That alone should make one look again – especially as national moods were so different 10 years ago.

 

 

Back then, there was a lively debate over who was Latin America’s true economic leader. To many Mexicans, the answer was obvious. The country had just completed a transition to democracy. Its economy was bigger than Brazil’s. It even had a robust banking system. Brazil, meanwhile, was just emerging from a currency crisis, and investors were terrified that it was about to elect a dangerous leftwinger, Luiz Inácio Lula da Silva.

 

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How quickly the tables turned. Brazil became one of the much-vauntedBric nations, ranking only behind China among them. Mexico was left behind, its economy now half the size of Brazil’s $2.6tn monster. What happened?



The answer, mostly, is China. Its entry to the World Trade Organisation undercut Mexican manufacturers, which lost business to rivals with far lower costs. Political leadership was also weak.



Mexico’s domestic economy remains stifled by monopolies – especially state-owned oil company Pemex. The national mood has been further soured by a war on organised crime that has killed 50,000 over six years.




By contrast, Brazil has gone from strength to strength. Its economy has benefited from voracious demand for commodities from China, its largest trade partner. Mr Lula da Silva was far from being the bogeyman many feared. Brazil also tackled oligopolies in its domestic market better than Mexico and set free its state-owned oil champion, Petrobras, allowing it to list and partner with foreign companies to explore huge oil reserves. While Mexico’s biggest trade partner, the US, lurched from dotcom crisis to subprime bust, Brazil enjoyed a lucrative run. It really did seem to beo melhor país do mundo”, the best in the world. It was certainly one of the luckiest.



Now that luck may be changing. For the first time in a decade there are good reasons to be less bullish about China – and thus Brazil. There are also good reasons to be more bullish about the US – and thus Mexico. China has lost competitiveness because of rising wage and transport costs. North American corporate supply chains are already shortening. If the US economy recovers, Mexican manufacturers should do well.




Mexico has also become a global car producer. The industry generated $23bn of exports last year more than oil or tourism. Nor are these cheapo maquiladora operations: Volkswagen and Nissan use Mexico’s web of trade agreements to export their cars to the whole world. As for Mexico’sdrugs war”, the once dizzying increase of violence has slowed and in some areas fallen. Why is not clear, but a 74 per cent increase in federal security spending will eventually make a difference, anywhere.



Brazil, however, has hit a speed bump. It can no longer count on commodity prices rising forever.


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More crucially, the country has developed a serious costs problem. Even in local currency terms – which strip out the effects of money printing in the west, the so-calledcurrency wars” – Brazilian labour costs have risen a quarter in real terms over the past decade. This has threatened domestic manufacturers and caused an unseemly protectionist trade spat with Mexico, so setting back regional integration. Brazilians may have an innate optimism, as Mr Slim said. But all this left Brazil looking fearful and Mexico rather confident.



This partial reversal of relative fortunes has somewhat dulled Brazil’s gloss. Envious Mexican officials no longer wince at the mention of the B-word as they once did. Still, Brazil offers at least one significant lesson. Over the past 17 years, it has enjoyed a charmed run of remarkable presidents, beginning with Fernando Henrique Cardoso. By contrast, the last Mexican president to show genuine leadership was Carlos Salinas – and his term ended controversially in 1994. It may be too much to hope that Enrique Peña Nieto, the telegenic 45-year-old candidate of the Institutional Revolutionary party (PRI), will provide Brazilian-style strategic vision should he win the July 1 election, as polls suggest he will. True, Mr Peña has said he will open Pemex to foreign capital and the economy to more competition. But the PRI has also spent 12 years in opposition squashing similar initiatives, so there are legitimate doubts.


Nonetheless, momentum for reform is building. Last year Mexico’s economy grew faster than Brazil’s. And only 12 years have passed since the end of Mexican one-party rule, while Brazil is in its third decade of democracy. Mexican politics could yet turn good. It is early days still.



Brazil’s size means it is unlikely ever to cede Latin America’s top slot again. Still, if you take the long view, Mexico’s prospects may be far rosier than many believe – including those morose Mexicans that Mr Slim described.

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The writer is the FT’s Latin America editor

Copyright The Financial Times Limited 2012



Buttonwood
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The question of extractive elites
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Bankers and the public sector may both be enemies of growth
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Apr 14th 2012
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THE developed world has a growth problem. Of 34 advanced economies, 28 had lower GDP per head in 2011 than they did in 2007. Forecasts for growth in the current year are anaemic. This sluggishness is generally perceived to be a hangover from the financial crisis of 2007 and 2008. But might the problem be structural rather than cyclical?



In their new book, “Why Nations Fail: The Origins of Power, Prosperity and Poverty”, Daron Acemoglu and James Robinson, a pair of economists, suggest that many countries are bedevilled by economic institutions that “are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity.” In contrast, “inclusiveeconomies distribute power more widely, establish law and order, and have secure property rights and free-market systems.
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In an extractive economy, such as the Belgian Congo and its successor state, Zaire, a narrow elite seizes power and uses its control of resources to prevent social change. Such economies can achieve growth for a while, particularly when (as with the Soviet Union in the mid-20th century and, the authors argue, China today) resources are being transferred from the unproductive agricultural sector into manufacturing. But they run out of steam eventually.



The authors place the developed world in the “inclusive category since they have, by definition, achieved economic success. But their description of extractive economies should ring one or two alarm bells in the minds of Western readers. “Because elites dominating extractive institutions fear creative destruction”, the authors write, “they will resist it, and any growth that germinates under extractive institutions will be ultimately short-lived.”




There are two potential candidates for extractive elites in Western economies. The first is the banking sector. The wealth of the financial industry gives it enormous lobbying power, including as contributors to American presidential campaigns or to Britain’s ruling parties. By making themselvestoo big to fail”, banks ensured that they had to be rescued in 2008.




Much of current economic policy seems to be driven by the need to prop up banks, whether it is record-low interest rates across the developed world or the recent provision of virtually unlimited liquidity by the once-staid European Central Bank. The long-term effects of these policies, which may be hard to reverse, are difficult to assess.




It is tougher to argue that the financial sector has inhibited growth in other areas of the economy. Indeed, both banks and venture-capital groups play a vital role in supporting new companies. Nevertheless, it is possible that the extremely high rewards in the financial industry might have diverted talented people away from other activities that could have helped rich economies to grow more sustainably. Furthermore, those high rewards could derive from “rent-seeking” by the financial sector, in the form of fees, charges and spreads, that have acted as a tax on the rest of the economy.



A second candidate for the extractive-elite category is the public sector. In some countries, such as Greece, there has been a clear policy of “clientelism” in which political parties have rewarded their supporters with jobs and benefits that have been funded by the general taxpayer. In the Anglo-Saxon world, public-sector employees now have more generous pension rights than the majority of private-sector workers.



An obvious objection to this line of reasoning is that there are too many public-sector employees for them to be regarded as an elite. Indeed, if you include the many recipients of social benefits, those dependent on the public purse comprise a majority of most rich-country populations. Such social policies are part of the inclusive model that Mr Acemoglu and Mr Robinson favour.



But it does seem likely that a high level of public-sector employment reduces the extent to which creative destruction occurs and new industries develop. Workers may prefer the security of government jobs to the riskiness of joining new businesses. As European governments are discovering, public-sector unions are often the most vocal in opposing the kind of labour-market reforms needed to reduce structural unemployment.



Just as a ship’s hull acquires barnacles, a government naturally attracts all kinds of supplicants and subsidy-seekers. If such behaviour is unchecked, then eventually the system may grind to a halt.