The Act of Rent-Seeking Crucially Cost in Late-Developing Countries - Essay Example

The Act of Rent-Seeking Crucially Cost in Late Developing Countries Rent seeking refers to the phenomenon where people attempt to use societal unions or organizations to propel themselves to better economic or competitive positions. The origin of rent seeking dates back to agrarian period where lords used their relationship with the king to acquire large tracts of lands. The peasants working for the lords viewed them as rent seeking even if they acquired the land through genuine ways. The peasants view was genuine given that the lords collected large proportion of benefits and were looking for more avenues of taking advantage of the peasants. Currently, rent seeking as advance in nature and governments are playing the central roles in facilitating it (Bardhan 2005, pp30-60). Rent seeking occurs today in a situation where a certain organization sets its prices too high without considering the interests of its customers or in a situation where the government forms a legislation favoring a certain group of people. Demonizing of rent seeking acts is referred to as the measures used to criticize or to show the bad picture of rent seeking acts. Non-governmental organizations and societies normally do demonizing of rent seeking acts. However, in some instances government organizations emphasizing in transparency are formulated to regulate on rent seeking acts. Rent seeking acts are majorly responsible for the development of labor unions and political parties. Morally rent seeking is unacceptable, and it deprives other people their rights. The unfortunate situation is that countries that are more involved in demonizing rent seeking are economically back wise. A perfect example is developing countries that every year is not experiencing a large economic growth and are stagnating economically. While in countries like Britain where, rent seeking got minimal restrictions are more developed. Therefore, in some way demonizing rent seeking has greatly contributed in the sluggish economic growth, in developing countries. In order to draw conclusions regarding this subject a proper understanding of rent seeking, economic development and political economy of rent seeking is under discussion in this paper. A government restriction on economic activities is a common practice in economies that are market-oriented. The government restrictions result to a series of rents that in most cases attract large completion among concerned parties. Although the competition is legal, rent seeking in some cases takes a different connotation that is illegal in nature. Some of the illegal rents seeking activities include; smuggling, corruption, bribery and black-markets (Krueger 1974, pp291-295). Unfortunately, the above uncompetitive forms of rent seeking mainly characterize developing countries. Poor governance is responsible for flourishing of uncompetitive forms of rent seeking activities in third world countries. For a better explanation of this point, the paper will prove the definition of corruption and governance and provide comparative evidence in economic development. Corruption has a variety of definitions. In this context, corruption will mean any exchange involving a public official(s) and private individual or group in which the public official or officials break the formal standard of practice and provide or receives something from a private individual that under normal work situation would not have been received or provided (Khan, 2006,pp200-210). The above arrangement is illegal because what the private individual receives gives them a competitive advantage over others and secondly the public officer acted illegally by providing the item against formal principle of conduct. The adoption of the definition is because it does not evoke moral judgment. This is advantageous because it avoids confusion of other acts with corruption. The definition of governance is connected to the state. Therefore, governance is defined as actions of states (Khan 2006, pp210-221). The wide scope is provided so as not to exclude any function of government thus widening transparency. The measurement and rating of performance of governments depend on their governance whether good or bad. Governance is good if the government is effectively managing corruption, manages expropriation risks, stabilized property rights and nature's democracy at the same time. The contrary of the above is poor or bad governance. Majority of developing countries growth is stagnating because of acts of corruption. Therefore, there is a public outcry for inclusion of societal organization in the formulation of government policies. The move can help seal any loop hole that can lead to non-competitive rent seeking activities. The perfect case study occurred in India when Kisan Hazare, seventy-three year old man hunger strike in protest against high rates of corruption. He was in particularly protesting congress-led central governments lack of determination and enthusiasm to punish individuals guilty of large-scale corruption scandals. In his hunger strike, Kisan Baburao Hazare was demanding involvement of civil society in drafting of strict anti-corruption rules referred to as Lokpal Bill. He claimed the government law was toothless and was formulated to fool the public. Harare and his followers “Anna” argued that the only way the anticorruption law will be stringent enough is through involvement of civil society in drafting it. During the period of Hazare’s strike, the Indian government was floating in a series of corruption scandals that included the controversial 2G spectrum tender allocation and the commonwealth games fiasco that both involved large financial losses to individuals (Sitapati 2011, pp30-60). Unfortunately, no one received punishment for misappropriation of the funds. Hazare received support from movie stars, civic activists and the middle class living in Delhi. Furthermore, the strike spread to other parts of the country. The Indian central government and congress formulation of policies and rules that give rule for corruption space is a negative rent seeking activity and is contributing for slowed economic growth in the country. In this particular case, demonizing such acts will result in positive economic growth. The Indian congress move of making anticorruption laws that are lenient to corruption perpetrators is a form of political corruption and abuse of office. Political corruption refers to misuse of public responsibility or public office for private benefit. Political corruption has become part of neo-liberal policies of alteration and transition to a more democratic society in Africa and the rest of the world. For instance in India after Ann hunger strike, a political movement emerged instead of maintaining the civil society ideologies that they heard (Sitapati 2011,pp 60-90). Although Hazare continued fighting anticorruption using non-political path, Arvind Kejriwal formed anticorruption movement enjoying the support of Hazare’s supporters across the country. Kejriwal and his group tried to comfortably take the opposition party position by making sharp attacks and criticism on both Bharatiya Janata Party (BJP) and congress via highlighting of corruption cases. The party was operating on the slogan that they are moving from Lokpal to Lokniti (Editorial 2012, pp 20-50). This implies that they are moving the country from non-stringent law formulation to stringent ones. In most cases, these political parties and movements are just used as avenues to power then nothing changes at all. Non-competitive form of rent seeking is euphemism for corruption according to many political scientists. However, multilateral donors and other economists argue comparison of rent seeking to corruption is an indication of failure by the state to perform control duties properly. Economists argue that the economic rent or an extra amount paid due to scarcity in supply of a commodity or something is valid. It is the function of the state to ensure the supply of that particular commodity is constant. Rents are varied some are natural and others are artificial in nature. The government has a role to play in market restrictions. They decide whether to grant monopolies or not it is also the role of the state to restrict competition or allow it. It is during formulation of these policies that certain individuals in the government seek rent for themselves (Szeftel 1998, pp221-230). Competitive rent seeking can result in good economic returns that are vital in a country's development. If the state properly regulates the rents in the international market in the advantage of their entrepreneurs and industries, it will yield positive economic development. Some of the expected results of competitive rent seeking restrictions include; operation of the economy of the country within its transformation curve thus resulting to constant economic growth targeted by the state. Secondly, the welfare loss from quantitative restrictions is clearly greater than the expected loss from equivalent tariff of quantitative restrictions. This is worth taking considering that tariff restrictions in international market results to growth of domestic industries of the country thus moving towards self-reliance. What makes it hard for developing countries to grow is influx of goods from other countries that are cheaper as compared to the goods produced internally. Therefore, consumer behavior always directs them to the cheapest substitute of the same commodity and as a result, the country industries experience sluggish growth. Thirdly, competitive rent seeking leads to divergence between social and private costs of certain activities. The benefits of competitive restrictions are clearly explained below (Krueger 1974,pp 298-300). It is vital to note that rent-seeking activities are more often than not competitive, hence resources are directed towards competing for those rents. Although it is difficult to note or observe the level in which rent seeking is competitive. The competitive nature of rent seeking is will be demonstrated through considering analysis of some trade cases. For instance, consider the case where licensing of imports of intermediate commodities or goods allocation is in relation to the firm’s size or capacity. The system is commonly used in many countries. For Indian case Padma Desai and Jagdish Bhagwati proved that when firms are allocated licenses in proportion of their capacities, the investors tend to invest more in their physical plant because they are assured of receiving more import licenses. Even with excess initial capacity, rational entrepreneurs will still be motivated to expand their plant or company. Entrepreneurs increased investment on additional capacity indicates their devotion of resources to compete for a large portion of import licenses. Interestingly, this behavior is resulting in the number of import licenses allocated remaining fixed and domestic investments increasing thus resulting in economic growth(Krueger 1974, pp 300). The second competitive rent seeking licensing mechanism adopted in developing countries is import licenses for consumer goods. The allocation of license is pro rata to the firms or wholesalers applied proportion of import license. Entry into import wholesaling is free for any wholesaler or firm and firms in most cases show U-shaped cost curves. The outcome of this measure is a large number of firms usually more than the optimal number expected. The firms operate on downward slope portion of their U shaped curves and at the same time earning normal rate of return (Krueger 1974,pp301). Due to more than the optimum number of firms applying for import licenses, each import- wholesaler purchases fewer imports than he would buy in the absence of licensing with the existing prices. However, the firms realize sufficient returns on the licenses bought to make it stay in business and make profits at the same time. The third form of licensing mechanism that makes rent seeking competitive is less systematic format. In this format government officials decide on the allocation of the licenses with a view of influencing the market trend either increasing or decreasing allocation(Krueger 1974, pp302). However, this mechanism of license allocation is usually susceptible for non-competitive rent seeking activities like bribery, corruption, officials employing themselves upon retirement or employing their relatives. The government should be more careful and introduce a series of transparency measures to ensure the officials do not stray from the line of duty. It is also important to discuss the quantitative importance of rent seeking activities. Previous records have shown that India might be a country with the lowest rates of corruption in Asia. However, it should be noted that corruption rates have increased in India over the recent years (Wade 1985, pp467- 497). A comparison of rent seeking activities of Turkey and India is made in this paper. In both, the countries estimates clearly indicate that import licenses value was sizeable for recipients. Competitive rent seeking move as minimum wage legislation results in balancing of unemployment levels. Although adoption of non-competitive rent seeking activities significantly cancels the importance of rent seeking. Stringent laws should be formulated to ensure rent seeking is healthy and beneficial. Demonizing rent seeking activities has both good sides and negative sides as we have seen from the above discussion. It is hard to determine if an organization or civil society is demonizing rent-seeking activities for the benefit of the country or some individuals are doing so for their own benefits. Civil societies are expected to be transparent enough and criticize rent-seeking activities that are not beneficial in the society. Civil societies are failing in their role of criticizing noncompetitive rent seeking activities. In most cases, civil societies criticize every rent-seeking act especially in developing countries. The leaders of civil societies have more often colluded with government officials in fueling poor governance. It is unfortunate that many civil society leaders are social and political scientist. Therefore, they do not understand policies that are going to benefit the society in the end (Palshikar 2013,pp30-50). For instance if the government introduces plantation farming practices and people are requested to vacate public land or transferred to other areas to create space for the project, civil society organizations will strongly oppose the move. This has made development plans in most developing countries to lag behind or incomplete. Civil society groups that strongly demonized rent seeking activities and received public support undergo transformation into political parties thus ascend to power. A perfect example occurred in Indian where Arvind Kejriwal rose to the position of Chief Minister of Delhi after converting the hunger strike movement protesting against anticorruption into a political party. The intention of this party and its leadership is to transform Indian political leadership to be a transparent and democratic one (Palshikar 2013,pp80-100). Aadmi Party in elections held recently in India emerged as the second largest party and is the main opposition party in India today. The party is acting as a check for the ruling party. With this, more developments are visible in India today with corruption scandals greatly reduced. If all developing countries could get such dedicated civil societies then more developments will be eminent. In conclusion, rent-seeking activities are two dimensional in nature that is it can be either competitive or non-competitive. A country development depends on the choice its government adopts between the two forms of rent seeking activities. Notably, most developed countries used rent-seeking motives in their transition to development. They employed methods like plantation farming where a few rich individuals managed land, and the others provided labor. The policy in the end resulted in the production of enough food to feed the entire nation. The same policy got adoption in the industrial sector. These rent-seeking measures got government support despite demonization of the act from civil societies and groups like labor unions. Therefore, developing countries demonizing of rent seeking activities plays a major role in their slow development trends. The current world requires the adoption of capitalistic policies where the more competitive run the economy, not socialistic policies concentrating on democracy more than economic development. Developing countries should learn on how to control non-competitive rent seeking activities and encourage competitive ones. List of references Bardhan, P. (2005). Corruption, Chp. 8 in Bardhan, P. Scarcity, Conflicts and Cooperation. Editorial.(2012). From Lokpal to Lokniti.Economic and Political Weekly. November 17. Khan, Mushtaq.(2006). Corruption and Governance. In: Jomo, S Kwame and Fine, Ben, (eds.), The New Development Economics: after the Washington Consensus. London and New Dehli: Zed Press and Tulika, pp. 200-221. Krueger, A. (1974). The Political Economy of the Rent-Seeking Society,American Economic Review.64, June, 291-303. Palshikar, S. (2013).Of Radical Democracy and Anti-Partyism.Economic and Political Weekly. March 9. Sitapati, V. (2011).What Anna Hazare’s Movement and India’s New Middle-Classes Say About Each other. Economic and Political Weekly. July 23. Szeftel, M. (1998).Misunderstanding African Politics: Corruption and the Governance Agenda’.Review of African Political Economy.25 (76), 221-240. Wade, R. (1985). The Market for Public Office: Why the Indian State is not Better at Development, World Development 13 (4), 467-497. Read More