Agile Governance

Ricardo Hausmann: Why governments adopt harmful policies. And why we go along with them

A woman walks through shadows cast by columns at the Old Royal Naval College in Greenwich east London June 10, 2014.

Ricardo Hausmann looks at belief systems and their influence on politics. Image: REUTERS/Luke MacGregor

Ricardo Hausmann
Founder and Director, Growth Lab, Harvard University
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When we hear of a catastrophe that has befallen a friend, we feel both empathy and a sense of vertigo. We wonder whether it could happen to us: Is this catastrophe the result of some peculiar characteristic that we fortunately do not share? Or are we also vulnerable? If so, can we avoid a similar fate?

The same logic applies to countries. On the weekend of July 16-17, Venezuelans were given the opportunity to cross the border into Colombia for up to 12 hours. It was an event reminiscent of the fall of the Berlin Wall. More than 135,000 people used this respite to go to Colombia to buy basic necessities. They traveled hundreds of miles and converted their cash for just 1% of the foreign exchange they would have received had they been allowed to exchange it at the official rate applicable for food and medicines. And yet they found it worthwhile, given the hunger, shortages, and desperation at home.

The international press has reported the collapse of Venezuela’s economy, of its health system, ofpersonal security, and of constitutional rule and human rights. All of this is happening in the country with the world’s largest oil reserves, just two years after the end of the longest oil-price boom in history. Why? Could it happen elsewhere?

The particulars of any situation are always, well, particular, and hence do not travel well. But that can provide us with a false sense of security; properly viewed, Venezuela’s experience holds important lessons for other countries.

Venezuela’s crisis is not the result of bad luck. On the contrary, good luck provided the rope with which the country ended up hanging itself. Instead, the crisis is the inevitable consequence of government policies.

In Venezuela’s case, these policies included expropriations, price and exchange controls, over-borrowing in good times, anti-business regulations, border closures, and more. Just consider this small absurdity: President Nicolás Maduro has refused, on several occasions, to authorize printing larger-denomination banknotes. The largest bill currently is worth less than $0.10. This has caused havoc in the payment system and in the functioning of banks and ATMs – a source of untold nuisances to the public.

So the relevant question is: why would a government adopt harmful policies, and why would society go along? The chaos into which Venezuela has fallen may seem to be beyond belief. In fact, it is a product of belief.

Whether policies sound crazy or sensible depends on the conceptual paradigm, or belief system, that we use to interpret the nature of the world we inhabit. What looks crazy under one paradigm may seem like plain common sense under another.

From February 1692 to May 1693, for example, the normally sensible people of Massachusetts accused women of practicing witchcraft and hanged them. If you don’t believe in witchcraft, this behavior seems incomprehensible. But if you believe that the Devil exists and takes over women’s souls, then hanging, burning, or stoning their bodies looks like sensible public policy.

The paradigm of Venezuela’s chavismo blamed inflation and recession on devious business behavior that had to be controlled through more regulation, more expropriations, and more managers in jail. The destruction of people and organizations was perceived as a step in the right direction. By getting rid of those witches, the country would be healed.

Societies’ conceptual paradigms for understanding the nature of the world they inhabit cannot be anchored only in scientific fact, because science can at best establish the truth of individual beliefs; it cannot devise an overarching belief system or assign moral value to outcomes.

Politics is about the representation and evolution of alternative belief systems. Harvard’s Rafael Di Tella has shown that the fundamental determinant of public policy choices is the public’s beliefs. In countries where people regard the poor as unlucky, they want redistribution; where they regard them as lazy, they don’t. Where people believe that businesses are corrupt, they want more regulation; and, with enough regulation, the only successful businesses are corrupt. So beliefs may even be self-perpetuating.

Consider Donald Trump, the Republican presidential nominee in the United States. According to him and his many supporters, the US is led by weaklings who are being exploited by savvy foreign powers, masquerading as allies. Free trade is a Mexican invention to take away American jobs. Global warming is a hoax invented by China to destroy American industry.

It follows from this that the US should stop playing a leading role in creating a functioning global order based on universal values and rules, and instead use its power to coerce others into submission. Under the current paradigm, as argued by Harvard’s Joseph Nye, this would imply the unilateral destruction of America’s most important source of “smart” power. But according to Trump’s worldview, it would be a step forward.

Much the same may be true of the United Kingdom’s vote to leave the European Union. Were immigrants and EU rules really blocking the country’s progress, implying that Brexit will open a path to greater prosperity? Or is the economic downturn since the vote an indication of how valuable integration and the free movement of Europeans was to the UK’s own vitality?

The danger that Venezuela highlights – and that Britain may soon highlight as well – is the damage that dysfunctional belief systems can have on national wellbeing. While the particular chavista creed that destroyed Venezuela will most likely end up collapsing under the weight of its own cataclysmic failure, the lesson for others is how costly it is to adopt a potentially dysfunctional belief system. When it comes to wholesale shifts in paradigms of belief, Venezuela shows how unaffordable such experiments may turn out to be.

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