0.9 Corrosion of institutions: rent-seeking

Rent-seeking

This topic sheds some light on why there are around the world such pervasive pressures for inefficiency, for failing to minimize costs.

The term rent-seeking was first introduced by a then young economist, Professor Ann Krueger. The phrase has become a part of the daily vocabulary of economics.

There has been long concern with rent-seeking across cultures. An example from Spanish literature would be Los Interes Creados (“The Special Interests”).

The Invisible Foot contrast with the “Invisible Hand”

Professor Krueger had a long-held concern about costs of rent-seeking. Three decades ago, she made an extremely useful contribution based on her work in U.S. and in Turkey. She integrated elements of international trade theory with the economic theory of bureaucracy and the systematic study of economic policy-making. The result was a seminal article called “The Political Economy of the Rent-Seeking Society.” It is assigned reading.

This contribution changed the way economists look at the workings of government, at influence-peddling, corruption and just ordinary bureaucratic ineffectiveness. It gave us a systematic way of studying issues related to corruption rather than relying on anecdotes.

Her framework, in the hands of later scholars, has enhanced our understanding of determinants of resource allocation and income distribution. We will see that rent-seeking behavior has implications that are rarely positive either for efficiency or equity, except by accident. Her framework deals with efforts by government officials, lobbyists, traders, and managers to secure favorable treatment from government officials. These favors result in “rents,” which go to the wealthiest, thereby worsening income distribution.

The theory shows how rent-seeking activities divert energies and resources from productive activities, thereby stunting economic growth and skewing the rewards from economic activity. Rent-seeking is thus a corrosive activity in any economy.

That is to say, successful rent-seeking activities have been one of the major factors accounting for maldistribution of income. This was long true, especially in Latin America.

The rent-seeking framework is also useful for analysis problems in the U.S., Canada and Europe. Is really useful for looking at 21 ^st century Russia, the “Kleptocratic society.”

Estimated losses for rent-seeking behavior in U.S. – 3% of GDP.

Effects of rent-seeking behavior are almost always very corrosive to economies and societies. When rent-seeking behavior interacts with structural problem of an economy, such as overdependence on oil revenue (Nigeria), the results can be spectacularly toxic.

In Turkey for example, there was an import-licensing system in seventies. Import licenses awarded to political favorites . It cost 15% of GNP.

To understand the consequences of rent-seeking behavior, you need to understand what is meant by the term “rent” in economics. We noted earlier that it has several meanings. Let us investigate. Distinguish always between “ natural rents” and artificial “ unnatural rents.”