Rent Seeking – Why is it wrong?
by Nischal Dhungel
In mixed economies, there is a greater role of government compared to free market economy. One of the key features of mixed economy is relative freedom to carry out economic activities with less government interference however it also actively creates an environment of rent seeking pretty much like a centralised economy. Lesser the government intervention, the greater the market gets regulated by the forces of demand and supply. Rent seeking is inevitable when government interference greatly prevails in the market. “Rent” mentioned in this article is perfectly synonymous with “Economic Privileges”. Economic privilege in simple terms means to take advantage in terms of resources or opportunities.
The economist Gordon Tullock first presented the idea of rent-seeking in his paper “The Welfare Costs of Tariffs, Monopolies and Theft” in 1967. After seven years, Anne Krueger coined the term rent-seeking in her paper The Political Economy of the Rent-Seeking Society (1974). Rent-Seeking is when an individual or entity uses resources of a company, organization or individual to gain market privilege via lobbying for protection/aid from the government. An example of this is: when a company tries to lobby the government for loan subsidies, grants, protectionist policies etc. In a layman’s language, rent-seeking is the equivalent of trying to get a larger slice of the wealth cake, without trying to make that cake any bigger. It is a zero-sum game strategy – the rent-seeker’s gain is equivalent to somebody else’s loss.
Krueger held the view that government restrictions give rise to rents in various forms, and people often compete for these said rents. Krueger pointed out that the regulation was so extensive that the government had the power to create “rents” equal to a large percentage of national income. For example: Her empirical evidence found that in India, there are high levels of competition for import licenses. According to her paper, import licenses in India covered a larger portion of source of rent resulting from the government intervention. The total value of rents estimated was INR 14.6 billion whereas the Indian National Income was INR 201 billion in 1964. The import licenses alone constituted 10,271 million which amounts to around 7% of national income. Beside import licenses, other source of rents were public investment, controlled commodities, credit rationing and railways. While allocating the license there are various means (legal and illegal) for competing for rents. The cost of obtaining import license is the direct result of the government intervention. The rent seeking is pervasive when there is government restrictions in the economy.
Rent-seeking limits the potential of a country’s economy to grow. Imagine you have been appointed as the head of a company and succeeded in persuading the government to introduce legislation that restricted competition and also made it arduous for new competitors to enter your market. In this case, you have managed to grow your total market share of current total wealth in that sector without adding anything to make that market bigger. Since competition drives down prices and a lack of competition keeps prices high, consumers pay more than they would in a truly efficient market that is unhampered by rent-seeking.
Provision of requiring a license might be good or bad depending upon the profession. For example, doctors are not allowed to practice if they don’t have a license – to protect the well-being of patients. License allows to bring competent doctor do their work in the best way possible way where the motive is to protect the well being of the patients. It however, there are some markets in the world where tedious, special license is required if you want to be a taxi driver, florist, or even an interior decorator. In such cases, the license requirements are simply barriers to enter the markets – they have nothing to do with protecting the consumer. They are in fact there only to protect the existing competitors and gives them,uncompetitive advantage. Tullock’s insight was that expenditures on lobbying for special privileges are costly. The lobbyists use their knowledge, time, creativity, hard work etc. for clients seeking special privileges, instead in activities that expand the size of the economic pie. Lobbyist’s hard work and creativity is wasted because they only redraw the slice-lines of a given-sized pie.Lobbyist’s hard work and creativity disappears gains that goes to the beneficiaries which may further lead to cause inefficiency in the market. Lobbyists can compete from equal level playing field instead of lobbying for special privileges. Productive resources go in vain when focus is shifted on gaining/seeking special privileges. Hence, society can never win when productive resources are utilized in nabbing special privileges.
In the context of Nepal, there is a strong link between political and business association leaders. The strong link leads to the strong lobbying capacity between the political parties and business associations to fulfill their vested interest. For example: selection of leadership in Nepal Association of Foreign Employment Agencies (NAFEA) is of political nature. Political parties have given top priority to manpower agency operators for crucial posts like Ambassador of countries of major foreign employment. Despite facing strong objection from their own party, the Chairman and high ranked office bearers of the government recommended a manpower agency operator as Nepal’s Ambassador to Oman. There could not be better example than this on how politics and business associations function. The vested interests of political parties in NAFEA has hindered the notion of protecting the rights of the Nepali migrant workers which is limited only on the papers. NAFEA’s immense lobbying capacity with the political leaders/parties has become a win-win situation for both parties to reap personal benefits. The internal and external politics has prevented competent individuals from top positions in the association hierarchy.
Rent seeking affects people’s perception of the economic system. If success in the market is viewed as the outcome of a lottery where wealthy individuals are successful/lucky rent seekers, whereas the poor are those precluded from or unsuccessful in rent seeking, the market mechanism is compelled to be questionable. Rent-seeking never encourages productivity. It is hard to move a society away from such unproductive behaviour. The best way to improve the situation is to reduce the role of the government and then there will be congenial environment where market is regulated by the forces of demand and supply. This leads to promoting fair competition in the market for every competitors (suppliers) and beneficiaries. To sum up, rent seeking privileges might disappear if transparency and accountability prevails at its best in the economy. The political impact of rent seeking increases when there is political consensus between political leaders and the rent seekers.
Reference article:
Rent Seeking by David R. Henderson: https://www.econlib.org/library/Enc/RentSeeking.html
Suggested Readings:
Krueger, Anne O. “The Political Economy of the Rent-Seeking Society.” American Economic Review 64 (1974): 291–303.
Tullock, Gordon. Rent Seeking. Brookfield, Vt.: Edward Elgar, 1993.
Tullock, Gordon. “The Welfare Costs of Tariffs, Monopolies and Theft.” Western Economic Journal 5 (1967):