Without ending ‘rent seeking’ Pakistan cannot prosper

The economist Gordon Tullock first wrote about 'rent seeking' in a paper in 1967, where he put forward the simple but powerful idea that so long as firms or well-organized interest groups garner gains through the pursuit of government favors that are disproportionately higher than the costs of doing so, it is not only rational but to be expected that they should do so. He also examined the processes by which ‘rents’ are extracted, for example, getting a subsidy for a good produced or certain privilege awarded for being in a particular class of people at the cost of the general good.  One of the most insidious forms of rent seeking is getting a protective tariff or a special regulation to impede competitors from entering, thereby allowing monopolistic practices to go unchecked. This deters innovation and the efficient allocation of resources towards improved productivity.

Tullock’s work as well as contributions by other economists such as Anne Krueger brought to public attention in the late 1970’s and early 1980s the manner in which well-organized interest groups had systematically captured the United States government and were strangling the American economy through rent-seeking. This created the political space for the government to actively work for its elimination. For example, the United States Department of Justice in 1982 instituted the breakup of the Bell System, which effectively eliminated the monopoly.

The proactive efforts of the US government in the 1980s to reduce rent-seeking was one of the contributory factors in the American economy bursting with creativity and entrepreneurial activity in the following decades, including the developments of the internet. A similar intellectual framework guided Margaret Thatcher to push for rapid privatization of state-owned enterprises and the reduction of the extractive power of unions in the United Kingdom.

Herein lies the power of ideas. Insight into perverse incentives in an economic system and consequent measures to mitigate against it in the 1980s helped pave revolutionary breakthroughs in telecoms technology, medicine, air travel, and many other areas that improved people’s lives universally.

Unfortunately, Pakistan continues to be replete with rent seeking across almost all spheres of economic activity, both in the public and private sectors. Rent-seeking is so deeply embedded that the state’s ability to carry out critical functions such as ensuring effective regulation to prevent market failures and efficient delivery of services has been considerably diminished. From the textile industry being granted various subsidies to the auto sector extracting rents through the protective tariffs on imported vehicles, there are a plethora of duties and special regulations that hamper competition entering almost every sector. Sugar producers get restrictions on imports and similarly other lobbies ensure regulations in place that come at a cost to consumers.

Elimination of rent-dependent activities would provide the impetus for a transformation towards the production of more value-added goods and a sophisticated economy much like China, India, Thailand and Vietnam.

Javed Hassan

One of the most egregious examples of rent-seeking are the one-sided Independent Power Producer (IPP) agreements that provide exceptionally high sovereign guaranteed dollar returns for over 20 years at rates that are well above the returns provided by sovereign bonds of a similar tenure. Such unfair agreements largely came about due to pressure from leading Pakistani industrial conglomerates clamoring for more electricity with the slogan that “no power is more expensive than power at any cost.” 

Ironically the same industrial lobbyists, who are often also investors in the IPPs, claimed that their companies in other sectors could not compete globally given the high cost of power and therefore demanded and received subsidies on electricity tariffs.

The IPP contracts have resulted in an unsustainably high and increasing quantum of government debt in the sector, which will invariably mean further power tariffs hikes. The same lobbies are once again likely to demand and possibly receive more tariff subsidies.

Other examples of rent-seeking activity include ownership of private housing authorities or other housing schemes by elements of state machinery, which generates distortions across the housing market. The laundry list of rent seeking is long and its harmful impact on the public good are severe. Political leaders and policy makers would serve the people well by ensuring that the state and its institutions stop facilitating rent seeking behavior.

The independent think tank, Economic Advisory Group, in its recent report, “New Vision for Economic Transformation” cogently argues for the need to eliminate rent-seeking behavior that has prevented economic resources from getting reallocated from less to more productive endeavors. Businesses that are unable to compete internationally through lack of innovation or inability to gain sufficient economies of scale, and only survive through state subsidies or protection, should be allowed to discontinue.

This would encourage economic resources to move towards more productive businesses that can compete globally. Elimination of rent-dependent activities would provide the impetus for a transformation towards the production of more value-added goods and a sophisticated economy much like China, India, Thailand and Vietnam have succeeded in creating. Without doing so, Pakistan cannot prosper.

– Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.
Twitter: @javedhassan