The P-I-E Model
By Arnold Kling
Jens Erik Gould reports in the New York Times,
Years of rampant violent crime is not only robbing Latin America of significant private investment, but in some cases is stealing up to 8 percent from national economic growth, economists and World Bank officials say.
…“You have money spent on guarding stuff rather than making stuff,” said Michael Hood, Latin America economist for Barclays Capital. “There’s a large population standing around in blue blazers rather than engaged in more productive activities.”
As E. Frank Stephenson points out, Nobel Laureate Douglass North understood this clearly.
I call it the P-I-E model. If you have secure property rights, you are in P mode (productive). If you do not have secure property rights, because criminals and/or government threaten them, you are in I mode (insecure, or operating underground in the informal economy). If you are one of the criminals or bribe-taking officials, you are in the E mode (for expropriation). When the P mode dominates, people are less likely to enter the E mode (because crime doesn’t pay) or the I mode (because it is more profitable to operate a legal business). On the other hand, when the P mode does not dominate, it is difficult to operate a legal business profitably, because you get either robbed by gangs or heavily taxes by government.