Category:Blog posts

Top 10 reasons democracy fails - #1-Resources Curse

I once had a job reviewing pesticide clearance studies for the EPA. The EPA had compiled a list of the top 10 reasons clearance studies failed. It made the job really easy and it worked, quickly. I thought that identifying and focusing on the top 10 reasons democracies failed would be particularly useful, too. These aren’t in any order, and hopefully the list won’t make it to 10.


 * 1) Resources Curse. This occurs when a country is “blessed” with an abundant natural resource, like petroleum. This abundance causes a lot of problems, but let’s focus on the political one - corruption.

It is often easier to maintain authority in these countries by allocating resources to friends and family than through growth-oriented economic policies and a level, well-regulated playing field. The huge flows of money from the natural resources fuel this political corruption. The presence of offshore tax havens provide widespread opportunities for corrupt politicians to hide their wealth.

If you have an easily-controlled huge flow of wealth and a place to hide what you skimmed off, you’ve got the basic ingredients for corruption.

The solution? 1) Disaggregate the flows of wealth and 2) eliminate the tax havens. For example, retain the majority of the income locally and only send the royalties to the central government. How to eliminate the tax havens? The problem here is that the people who could eliminate them also benefit from them and these havens are hiding the wealth of very powerful people.

I’ve been talking about natural resources, but these same concepts can be applied to intangible resources. Say, for example, a nation collects yearly tax revenues of $2.16 trillion. That’s not hypothetical, that was the US tax collection for 2010! This flow of cash goes through Washington DC, where 1 president, 1 vice-president, 100 senators and 435 representatives control it. 537 people controlling $2.16 trillion. We’ve got the first ingredient for corruption - hugh flow of wealth that is easily controlled, once you’re elected. No wonder US elections are so bitterly fought - there’s a lot of money at stake. Second ingredient - are they wealthy enough to need a tax haven? Nearly half are millionaires. So are they interested in overturning tax havens? Probably not. Once somebody is on their way up, financially speaking, they are probably starting to think about how to hide wealth, even before they have it. There’s another reason destroying tax havens is unpopular: it’s political suicide because the havens are hiding the wealth of the very powerful. You don’t want to antagonize them if you are on your way up politically.

The world’s biggest tax haven is going to be in the news again soon. Swiss banker Rudolf Elmer gave WikiLeaks founder Julian Assange two computer discs with the names and accounts of tax evaders, nefarious bankers, shady politicians, unethical business leaders, cheating celebrities, organized crime bosses, etc. Maybe this is why somebody is fighting viciously to incarcerate him. Not because of the US State Department cables, but because of the trillions of dollars hiding in Swiss banks he’s about to expose.  That’s the big cataclysm coming . Pay attention to the news. If you don’t hear anything, you’ll know who won.

Solution to Democracy Failure #1: Disaggregate the flows of wealth and eliminate the tax havens.

http://en.wikipedia.org/wiki/Resource_curse

http://en.wikipedia.org/wiki/United_States_federal_budget

http://www.opensecrets.org/news/2010/11/congressional-members-personal-weal.html