The arithmetic of extortion

04. February, 2009

Valdis Kalnozols, once the boss of one of Latvia’s largest construction companies, gave an interview (in Latvian) with some straight talk about public procurement in construction.

Here is a nice passage:

“The prices are inflated… About 5-15% [of the procurement contract] is the sum that must be given back to certain people, political parties and so on… At the moment in road construction, it seems, everything is clear ten years ahead, who will build what bridge. Also in the construction of large objects – if political power will not change, we can talk about 2-3 years ahead, who and where will build potential objects…”

And this one:

“…for example, a firm X obtains a public procurement contract worth 10 million lats, and each month a part of the incoming cash flow must be transferred to where a [party’s] cashier says, and that’s it.”

A truly hilarious part of the interview is where the journalist is being incredulous as to why nobody wants to do anything to stop the corruption. Mr. Kalnozols reasonably points that, if you take a million lats from the people (i.e. the taxpayers), they won’t like it but will not really do anything about it. On the other hand, if someone will try to expose a secret deal where some people steal a million of taxpayers’ money, the chances are that on the next day this guy will be shot. Mancur Olson’s “Logic of Collective Action” in action. Indeed, if a relatively small group of politicians steals a million lats from the taxpayers, the per capita gains are high enough to justify the effort of each participant. Suppose there is a million taxpayers who are the victims of this theft. Then each loses one lat. For each individual taxpayer: does the goal of recovering 1 LVL of his tax money justify the risks of being shot?

The situation with the farmers is just another example of this arithmetic. If a few thousands farmers can get 27 millions of lats at the expense of other taxpayers, per farmer gains are large enough to put up the kind of show they did. It would be in the common interest of the other taxpayers to erect the barricades to stop the farmers from entering Riga. And yet, it is in the individual interest of no-one to participate in such an endeavor because per taxpayer gains from resisting the farmers are so small relative to the cost of going to the barricades. This is what Olson called the “paradox of collective action”, which, sadly, is what we see.

In Latvian here

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