This system, in which, in principle, the state may intervene at its own discretion without any restraints, poses serious moral hazards. Self-interested legislators are apt to use their votes, and agency heads their powers, to award projects in order to win the support of interest groups that can keep them in office. For those in office dispensing patronage, it is more convenient to award clients and cronies monopoly power than to award them contracts paid with scarce tax revenue. The gain of these “insiders” disadvantages “outsiders,” who may be unable to start a business, break into an industry or have a rewarding career – whether or not “protected” with subsidies for medical care, food and heat. This is the burden of extreme corporatism: the deprivations for few or many of basic goods like careers, which are not morally compensated by the spoils of the advantaged, few or many.
In Tunisia the insiders were those well connected to the ruling family and in Egypt the insiders were the members of the military, who had a share in the ownership or management of privatized enterprises. The youth protesting in Tunis and Cairo wanted to start businesses, enter industries, compete for places in companies and see an end to excessive licensing.
Now, in corporatist Tunisia, foreign banking interests are teaming up with Tunisian insiders to launch a new round of infrastructure projects, including important initiatives in the desert. These projects would not contribute to the advancement of the young Tunisians, who are looking for a career, not temporary construction work. In Egypt, the interim government and the military seek loans to start new infrastructure projects. In the past, if projects do not pay back, the IMF made it possible for governments in fiscal trouble to pay back their creditors. With the repayment of the loan from the IMF, the latter signaled it was safe for private creditors to resume lending, secure in the knowledge the IMF will guarantee repayment again.
In corporatist Europe, a new sort of alliance has emerged. The politicians want sovereign bonds rated risk-free in order to be able to borrow at very low interest rates and the banks want sovereign debt to be rated so risk-free that no capital is required against bank holdings of these assets. This was accomplished through an implicit commitment to bail out a government in the event that it has serious difficulty servicing its sovereign debt. This alliance may seem to benefit the insiders, both the politicians and the banks. But the implicit bond guarantees impose costs on the public. The economic system would work better if creditors bore the risk of the state’s default and set interest rates correspondingly high. That way, the state would no longer have an artificial advantage in debt markets over the private enterprises that borrow – an advantage on top of the advantage the state derives from its size and whatever reputation it can establish. And the governments will no longer be subsidized to take the risks caused by heavy debt levels.