Rent seekers, is the world your oyster?

Published : 25 July 2014, 05:07 PM
Updated : 25 July 2014, 05:07 PM

Unsure of the situation, when faced with the prospect of getting educated to earn a living, many of us chose to sail out of the country — for many of us the competition, either to get a place in a reputable university or to secure employment after education, was too steep. The obvious shortcut, at least for those of us whose parents could afford it or those who could secure scholarships, was to get out of the country for higher education, and if possible settle there permanently.

In such a preoccupied state, wrestling with the odds of destiny and unsure about the future, students rarely choose a discipline that they may enjoy. In fact, few students probably knew what they would enjoy in studying at a young age. Of course some knew what they would like to be, and they often became very successful.

I wasn't one of them. I was an escapee who grabbed the most accessible and cheap overseas education that would be likely to help me to attain permanent migration. So perhaps it is normal for us to miss the opportunity to study something that could have genuinely interested us or led to professional fulfilment.

Thankfully there remain ways to explore your missed subjects. I have next to no knowledge of economic principles and how they affect economies, yet this discipline fascinates me, especially for leisurely reading. Analysts uses it to try out concepts, debate ideas often generating interesting discussion topics; for example, 'inequality' which this year has received special attention and readership following the release of a blockbuster book (and work) by a French economist, Thomas Piketty.

Some of the economic topics are familiar, almost palpable in everyday life, such as the economic concept of 'rent-seeking' – which, crudely put, is to gain 'special or excess of the expected' return on investment. 'Rent' here is special because as an investor one will not only hit investment targets but more moolah will flow in – in some cases much, much more.

A classic example could be a home, land or investment originally made expecting let's say an x% annual return. But because you have always been lucky (and in the know) the government happens to declare a major infrastructure project (e.g. a highway, a bus stop) nearby your property making it instantaneously sought after. The demand for land in the area goes through the roof, attracting y% annual return on your investment. The difference between the original x% and a much higher y% is the economic rent, when you pocket a large sum without investing a cent.

This would not be an issue when it occurs through 'sheer accidental luck', but more often than not special returns are made possible by political connection. This can vary and include anything: blatant corruption, non-competition, tough-appearing regulations allowing licenses and permits only to a selected few, or when auctions or tenders are staged to sell (transfer) public assets at bargain prices. For example, in the recent years the Independent Commission Against Corruption in New South Wales has found a number of ex-ministers involved in such corrupt conduct. The commission found that rent seekers had access to secret information and were preferred by the NSW ministers when issuing building approvals and mining licenses.

The concept cannot be easier to grasp by randomly considering scenarios from our country – bribery, a whole host of formal and informal licensing fees in a range of industries, or direct and indirect commissions and payments to keep business concerns ongoing.

But what may be the harm, specially, if it has been an integral part of the economy? After all, rent seeking with its ills is only one element of the economy, like production or distribution. To illustrate, let's say we accept that to get our mails delivered to our homes, we regularly tip postmen, or to get uninterrupted electricity we pay an extra-amount to the local authorities, and when the society, in utter necessity, adapts to accommodate these activities they must form a part of the economy – and are likely to flourish. With time, they may not even be perceived as rent-seeking activities.

Consider, for example, the bureaucracy. In general to enter a bureaucracy it requires above-average educational achievements, but to shine (or sometimes even to survive) in a cutthroat machine one would need to invest a lot more than just education and expert knowledge. Then it is only fair that one expects to get back an equal return, eventually. It is only natural that officials enjoy formal and informal income (plus authority). In fact, these are the perks of those jobs that make them attractive.

Of course, this is not to say that every government official in an economy acts this way — but they can be prone to. In addition, the competition to enter the service opens more opportunities for rent-seeking by many players.

And gradually these can become norms. To demand and accept bribes may have been frowned upon once, but now it is seen as 'speed money'. The rigmarole of difficult licensing mechanism may be viewed as an investment to attain higher long-term returns. Practices such as hiring relatives of officials or officials themselves upon retirement have become common lobbying tactics for businesses.

Well-connected people have been making fortunes this way for a long time – and everywhere. If the proverbial 'robber barrons' made their appearance in North America in the 19th century, they are out in numbers in the world today. In trades, commodities, properties, hordes of industries from resources to telecommunications, inevitably anything relating to the state and state interest is exposed to rent-seeking activities.

Yet its damaging effects are obvious and flashing. India, considered to have much stronger institutions and governance structures than its neighbours, is still reeling from the sensational scandals of its last government. To quote from The Economist's special edition on the topic on 15 March 2014:

"RaghuramRajan, the boss of India's central bank, worried that India could start looking like an oligarchy along the lines seen in Russia: too many people have got too rich based on their proximity to the government.

India needs its private sector to build roads, factories and cities. But the relationship between companies and the state is broken. Inept cronies have messed up vital road and power projects. Mines and other assets lie idle as courts dither over how crooked their owners are".

Though cronyism, like dictatorships can still benefit and perhaps edge an economy forward – Russia, Malaysia (some even name China) are such samples – leaving behind inerasable scars. In spite of stellar economic growth and prosperity (for some), cronyism makes living difficult for ordinary people, especially for those without connections.

Who can fix this? Obviously, government, with the power to enact and enforce laws, and the super-rich who enjoy such privilege. But their interests are magically intertwined. Well-meaning bureaucrats and economists could propose practical plans for change, but like everyone else they usually fall victim to greed.

Notwithstanding, one needs to remain hopeful: technology (e.g. electronic ticketing), business innovations (private suppliers) could eliminate petty graft; market forces (economies and governments need investments) may combine with voters' dissatisfaction to force governments to take remedial actions.

Yet, for the foreseeable future in many nations, these appear as far-flung concepts. Our generation (and those before and after) did not seek migration only for higher education.

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Irfan Chowdhury writes from Canberra, Australia.