Marketplace

Another Gold Brick in the Wall

Bennett Voyles writes on global trends. He was formerly with The Economist Intelligence Unit
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Why democracy and protectionism don’t mix
To understand why India should further open its economy, you might want to go to El Paso, Texas, and see a section of the five-metre high wall that now separates around 1,100 km of the long dusty border between the United States and Mexico.

El Paso’s wall is not much to look at. It doesn’t have the brutal gravitas of the old Berlin Wall or the architectural character of the Great Wall of China. Considering it cost $600,000-$1.8 million per kilometre, Uncle Sam should have gotten more for his money than an overgrown expressway barrier. But as a case study of what happens when a large and chaotic democracy tries to stop millions of people in two entrepreneurial countries from doing business together, it’s worth a closer look.

Washington ordered the wall in 2006 to help stem two problems: first, to stop Mexican drug dealers from fulfilling the voracious US demand for illegal drugs, and second, to stop undocumented workers who sneak into the country to do jobs no one else would do at wages no one else would take.

In terms of meeting its stated goals, the Secure Fence Act of 2006 has been a failure. On the south side of the wall, the cartels are more vicious now—as many as 100,000 people have died in wars between drug cartels since 2007—and the drugs they smuggle in are far more potent. On the north side, the country now keeps around 2 million people in prison, many for drug-related offences— 25 per cent of all the prisoners in the world.

However, considered as a business in its own right, there’s only one word for the government’s long line in the sand: perfect.

In fact, the wall is almost a perpetual motion machine for political profit. First, there are the contracts involved in maintaining and monitoring the wall, including 20,000-plus guard jobs. Besides the usual opportunities for graft and bribes, the drug war in Mexico has also increased US arms sales (gang members reportedly favour the US arms market as it is much less regulated than the Mexican market). The wall has also helped keep drug prices high, ensuring that economic incentives remain so attractive there is no reason to fear the country will ever lack smugglers.

But rest assured that the wall is not really in danger of actually disrupting the illegal commerce in any meaningful way. Mostly everything reportedly travels by freeway these days. Thanks to the boom brought on by the North American Free Trade Zone, only a few trucks are inspected: the volume of commerce is so high that immigration officials estimated that if they tried to inspect every truck, in just two weeks the traffic would be backed up all the way to Mexico City, 700 km away, according to an immigration official quoted in Peter Andreas’ 2013 history, Smuggler Nation: How Illicit Trade Made America.

The effort at the southern border has also encouraged Canadian entrepreneurs. British Columbia is now a centre of indoor marijuana farming—an industry now so vast that one 2010 report estimates that the growers of the extremely potent ‘BC Bud’ in British Columbia steal about $100 million of electricity every year to keep their secret greenhouses lit.

All in all, what HL Mencken said in 1925 of Prohibition is just as true of the US drug war as it moves into its second century:‘There is not less drunkenness in the Republic, but more. There is not less crime, but more. There is not less insanity, but more. The cost of government is not smaller, but vastly greater. Respect for law has not increased, but diminished.’

It’s true that Colorado and Washington State have just legalised marijuana, but there are 48 states to go, and there is no sign that the federal government is ready to give up the power and money the drug war keep bringing in.

Mexican labourers, meanwhile, are now reportedly either leaving the vault to professional smugglers or just staying home. Free trade has created such a boom in Mexican factories that the opportunity to clean someone’s pool in Malibu for less than minimum wage and a good chance of forced deportation is looking a lot less attractive now.

Drugs and illegal aliens are particularly colourful commodities, but there is nothing special about the business opportunity the attempt to block their entry creates for officials—any commodity for which there is demand will do. A retired Texas sheriff told The Guardian in 2011 that besides some extra money he made smuggling whisky and cigarettes into Mexico and people into the US, back in the 70s he once brought sugar in from Mexico and sold it to a pie maker in Philadelphia.

A surprising amount of official energy goes into stopping this fairly plentiful white powder from getting into the country. In his book Republic, Lost: How Money Corrupts Congress—and a Plan to Stop It (Twelve Books, 2010), Lawrence Lessig, a Harvard Law School professor and campaign finance reform advocate, estimates that although the sugar duty costs the American economy about $3 billion a year directly (and indirectly, another $147 billion in medical complications wrought by the substitution of high-calorie high-fructose corn syrup as a sweetener, which has helped make America fat), sugar producers hang on to their $1 billion benefit because it generates a steady—and steadily rising—source of campaign contributions. As of 2010, the sugar industry invested nearly $6 million a year in Congress, and the heavily subsidised corn lobby chipped in nearly $20 million more. ‘There is no explanation for protectionism today that isn’t tied to corruption,’ says Lessig in an email.

Strictly speaking, campaign contributions are not corruption. The US Supreme Court says that people are just exercising their constitutional rights to speak to their representatives. But a few academics have argued that the traditional definition of corruption is too narrow: instead of thinking of corruption as simply being the relatively inefficient business of greasing a few palms to get their way, the powerful pay legislators to change the law. In the last analysis, whether something is legal, write Daniel Kaufmann and Pedro Vicente in their 2011 paper ‘Legal Corruption’, is merely ‘a decision variable of the elite in power’.

Kaufmann, now president of the Revenue Watch Institute, a New York anti-corruption think tank, and Pedro Vicente, director of the Nova Africa Center for Business and Economic Development in Lisbon, calculate that from this point of view, the Land of the Free starts looking kind of expensive. Kaufmann and Vicente rank the US right around Angola, Nigeria and Kenya if you combine illegal corruption and what they define as legal corruption—and that’s based on 2005 data.

Some economists argue that tariffs are almost inherently corrupting. “In theory, a tariff should be just like any other tax,” says John VC Nye, a professor of economic history at George Mason University in Fairfax, Virginia. In practice, though, tariffs tend to work out differently, he says. Importers try to evade the tariff by working around the definition. This leads authorities to add more definitions to close the loophole, which in turn leads to more creative evasions and more attempts to close the new loopholes—and new opportunities for corruption. “Each set of evasions creates new rules, which then lead to new levels of corruption,” Nye explains.

“If everyone around you is corrupt, your chance of being caught is low; if everyone is honest, it’s expensive, and [you] will tend to be honest,” explains Pushan Dutt, an associate professor of economics and political science at INSEAD in Singapore, who also studies the economics of corruption. “Once you settle down into one of these outcomes, it’s very hard to move into another outcome.”

At some point, if the rules get complicated enough, only the best-connected and most sophisticated players can navigate them, Nye says. And at this point, it becomes a barrier to entry (for other would-be players) that incumbents will fight to preserve.

Such rules can end up creating cynical sorts of alliances. During Prohibition in the US, for instance, ‘bootleggers and Baptists’, members of a teetotalling religion, were said to be the two constituencies that most wanted to keep the temperance experiment going.

The impact of this kind of corruption goes far beyond the industry and officials in question. “One of the byproducts of that habit is that it undermines the genuinely good things that government does… you create cynicism which treats all the rules as fungible,” Nye says.

This link isn’t an entirely new observation. The British economist Alfred Marshall, John Maynard Keynes’ mentor, visited the US in the 1870s to study the American tariff system and came back convinced they were a bad idea—less for economic than cultural reasons. At the time, the tariff system had made the customs office hugely profitable to the government and customs officials, who gained both on a share of fines and forfeitures and through bribes.

In his book Smuggler Nation, Andreas describes how this made the collector of Customs in New York a coveted position, said to be second in prestige and influence only to a Cabinet appointment. Chester Arthur, the chief customs officer in New York and later President, once earned $56,000 on a single bust—more than the President’s annual salary at the time.

Marshall later wrote, ‘I found that, however simple the plan on which a protective policy started, it was drawn on irresistibly to become intricate; and to lend its chief aid to those industries which were already strong enough to do without it. In becoming intricate it became corrupt, and tended to corrupt general policies.’

Or as Jagdish Bhagwati, the Columbia University economist, has observed in a discussion of how the Licence Raj gradually corrupted the Indian Administrative Service: ‘Where substantial corruption can unambiguously be found, as it often can, one must recognise that it is not a cultural given. On the contrary, often it is the result of policies that have fed it.’

In other words, every country is a land of opportunity. The only question is: for whom?

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