Rent-seeking lessons from Mubarak to Louis XIV

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We will never know how much Hosni Mubarak might have stolen. One so-called expert has even put the wealth of the deposed president of Egypt and his family at more than $40bn, which would make him one of the world’s richest men, alongside Carlos Slim, Bill Gates and Warren Buffett. Other estimates are much smaller but they still place him among the world’s billionaires.

Whatever the true extent of the Mubarak family fortune, it stands in stark contrast to the lot of most Egyptians. Gross domestic product per capita in Egypt is a mere $2,500. In western Europe and North America GDP per capita is about $40,000, yet the capacities of Egypt’s intellectual and entrepreneurial elite are the rival of any state in the world.

The real damage imposed by men such as Mr Mubarak is not the money they might have stolen. The tragedy is that the system that enables them to steal it destroys opportunities for others to generate wealth – not only for themselves but for the whole population.

The price of requiring a potential Mark Zuckerberg or Mr Gates to pay a $100 bribe to each of 10 officials before he can establish his new business is not the $1,000 creamed off by corrupt bureaucrats. It is the far greater one of lost businesses that never came into being because the licensing process that makes such corruption possible was not navigated. In the meantime, people who might be successful entrepreneurs choose instead to seek political power. If business is endlessly frustrating and politics endlessly rewarding, the career choice for able and enterprising people is obvious.

Institutions are the key influence on economic prosperity – West Germany did not outperform East Germany because of its excellent monetary policies. And, as Daron Acemoglou and James Robinson point out in their book, Why Nations Fail, a critical feature of successful economic institutions is that they limit the scope for what these authors call “extractive activity” – others have described it as predation or rent-seeking – which appropriates the wealth created by other people.

“I am the state,” said Louis XIV, and when you are the state, the law supports you and the wealth of the state is yours. The most wicked of criminals often do not break the law, because they control the laws. Mr Mubarak, the Stuarts and Louis XIV created societies in which wealth and power were conferred not on those who had succeeded in business but on those who were their friends or had provided support for their leadership.

The conduct of their courts discouraged productive enterprise and diverted talent to activities that stifled rather than promoted economic growth. Sir Thomas More and Oliver Cromwell would probably have been successful leaders of great corporations, but that was not what they did, nor what it made sense for them to do.

With some literary licence, Mr Acemoglou and Mr Robinson identify England’s Glorious Revolution of 1688 as a turning point in modern history. Parliament deposed the Stuart dynasty and put a Dutch merchant and his wife on the throne as constitutional monarchs. That uprising established a framework for inclusive institutions that would foster a democratic society and could limit the power of “extraction”.

Some friends of the court benefited from state-granted monopolies, a common phenomenon today. In Egypt – and strikingly in Russia or Latin America – we see politicians who masquerade as entrepreneurs, businessmen whose power and financial success come not from the resources and activities they helped to create but from the resources and activities they used their influence to control.

The boundary between predatory and productive activity is sometimes hard to define, but it is necessary to be ever vigilant in policing it. Before we congratulate ourselves on our free-enterprise system, we should recognise how vulnerable our own societies are to extractive activity.

Much of what happens in the financial sector has this character and the activities of those who steer corporate contributions to congressional and presidential candidates differ only from those who brought soldiers to the side of the Yorkists or Lancastrians in that they have adapted their methods to changing times.

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