SOME COUNTRIES PRODUCE SO MUCH MORE OUTPUT PER WORKER THAN OTHERS: Determinants of Economic Performance 3

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Thus the suppression of diversion is a central element of a favorable social infrastructure. The government enters the picture in two ways. First, the suppression of diversion appears to be most efficient if it is carried out collectively, so the government is the natural instrument of anti-diversion efforts. Second, the power to make and enforce rules makes the government itself a very effective agent of diversion. A government supports productive activity by deterring private diversion and by refraining from diverting itself. Of course, governments need revenue in order to carry out deterrence, which requires at least a little diversion through taxation.

Diversion takes the form of rent seeking in countries of all types, and is probably the main form of diversion in more advanced economies (Krueger 1974). Potentially productive individuals spend their efforts influencing the government. At high levels, they lobby legislatures and agencies to provide benefits to their clients. At lower levels, they spend time and resources seeking government employment. They use litigation to extract value from private business. They take advantage of ambiguities in property rights.

Successful economies limit the scope of rent seeking. Constitutional provisions restricting government intervention, such as the provisions in the U.S. Constitution prohibiting interference with interstate commerce, reduce opportunities for rent seeking. A good social infrastructure will plug as many holes as it can where otherwise people could spend time bettering themselves economically by methods other than production. In addition to its direct effects on production, a good social infrastructure may have important indirect effects by encouraging the adoption of new ideas and new technologies as they are invented throughout the world.