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Mainstream, VOL XLV No 31

Political Entrepreneurs and the resulting Vicious Circle of Rent-seeking

Saturday 21 July 2007, by Vinod K Anand

The inclusion of the role of the “State†in the conventional framework of Economics brings us to the domains of what is termed as the New Political Economy (Anand, 1996), the positive side of which very clearly defines the role of the State in terms of rent seeking activities and directly unproductive profit-seeking activities (Bagchi, 1993; Bhagwati, 1982; Buchanan, 1980; Moohammad et el, 1984) These activities, in fact, survive on their own and work against the smooth and economically efficient functioning of the economy. Beyond that they lead to many adverse effects offering strong barriers in the way of the trickle down process (Anand, 2001A; Aiyar, 2000), thereby setting in motion a highly complicated vicious circle of rent seeking. In other words, these activities amount to leakages in the national income, which not only corrode the whole growth process (Panandikar, 2001), but also adversely affect the trickle down process But even if growth takes place otherwise, its benefits do not reach the masses essentially because of the rent seeking and other vested activities of the State and its components. The rent seeking activities, therefore, provide the initial impulse to the failure of the trickle down effect which, in turn, accentuates the already existing poverty levels, including unemployment, and income gaps. The more acute the poverty, the more the marginalisation of the poor, and the greater, thus, the propensity to conceal poverty through various means, like borrowing and crime-related activities, both of which beget easy money to the stakeholders. (Anand, 2001B) Such impetus to crime strengthens the mafia links and also encourages organised crime, and even extends to the higher strata of society that includes, amongst others, the basic role players in the guise of political entrepreneurs (both ruling and non-ruling) and their supporters (both administrators and voters) in the whole game. Such nexus and linkages give a further boost to rent seeking and other related activities. The circle, thus, gets completed, and rent seeking leads to further rent seeking, and this chain reaction goes on unabated, viciously trapping the economy in a deadlock situation. The diagram on this column depicts the operation of such a vicious circle. This complicated vicious circle, apart from being interlocking in itself and leading to further rent seeking through a variety of factors, is also anti-growth, anti-equity, and anti-saving. (Murphy et al, 1993) It goes on unabated and generates, at increasing rates, rent-seeking leakages (essentially, horizontally and diagonally), crime in all its manifestations, private debt trap and mafia nexus/linkages to the advantage of the major role players in the whole game.

Although this is a purely hypothetical scenario devoid so far of any empirical studies in its support, yet it is observed to exist in different countries, albeit in different degrees. It has also started to emerge in certain other countries, where the trickle down process has utterly failed because of a variety of reasons, and, as a result of this failure, nothing positive (in terms of economic and social provisions) ever gets percolated to the masses in general, and the equity considerations, if any, have their focus more at the macro level, and nothing much is done at the grassroot levels. The root cause of this depressing scenario is the vested interests of the so-called political entrepreneurs and their supporters, that get exhibited in the form of rent seeking and other nefarious activities, which are subject to increasing returns because of their self-generating capability, larger involvement of the stakeholders and, above all, because of the inefficient legal system. In order to break this vicious circle of rent-seeking the very best way out is to minimise or eliminate, if possible, such activities of the political entrepreneurs and their supporters. But the political experience of countries completely negates such a solution. We have, therefore, to depend on the second best solution that relates to the efficacy of the legal system. The basic rules of jurisprudence to tackle such situations are always available in almost all the countries, but the reality is that these rules are not effectively and timely used by the concerned authorities to curb the given situation and the role players, thus, keep on playing their game of manipulation and manoeuvre for their own benefit in terms of enhancing their electoral support, and reaping political mileage to the detriment of the whole economy. The judiciary should, in fact, take matters in hand and ensure that the major role players of the State do not resort to their clever stratagems. This perhaps is the only effective way to break the given vicious circle of rent-seeking, and bring back the economy to its normal functioning. There is also a third best solution that can perhaps reduce both the extent and intensity of marginalisation of the poor by the richer sections of the society, which is a crucial link in the operation of the aforementioned vicious circle. This solution relates to well focused urban policies. It is seen that marginalisation in urban areas (or urban apartheid) has become increasingly extreme in most of the countries, and challenges the fight against poverty. (Sane and Binde, 2001) Urban policies, therefore, have to be tuned to ensure, apart from other things, the common social ethos of the rich and poor, so that income-based, caste-based, class-based, and even racial-based discrimination and intolerance is at least reduced, if not completely eliminated, from the urban areas, thereby weakening the operation and the impact of the vicious circle of rent-seeking.

ALL those re-distributive activities (amounting to transfer), which take up real resources, and do not, in any way, add to growth are termed as rent-seeking activities. The connotation of the word ‘rent’ is the same as used by the classical economists to indicate the ‘unearned income’ accruing to monopolist landlords, but the concept of rent-seeking goes beyond monopoly rent, and covers all kinds of legal and illegal extortion by individuals with or without the support of government and also directly by government itself and its officials in the name of government intervention. Rent-seeking, thus, maligns and denigrates all government intervention.

It is also shown that rent-seeking activities are subject to natural increasing returns, which means that, as more and more resources move into rent- seeking, returns to rent seeking become larger and larger. This also means that an increase in rent- seeking lowers the cost of further rent-seeking. In essence, therefore, it can be said that a very high level of rent-seeking may be self-sustaining. There are three ways in which rent-seeking exhibits increasing returns:

i) It is self-generating and ‘infectious’ in the sense that it passes from one person to another. This is so because, in the absence of any protection from the government, one has to protect oneself on his own against the ill effects of rent-seeking activities. In other words, one has to have one’s own defence, and the best defence is offence itself, that is, getting involved in rent-seeking itself.

ii) It depends largely on numbers. ‘The more the merrier’ describes the success of rent-seeking activities. Larger the number of people getting involved in such activities, higher their returns.

iii) A time-consuming, inefficient legal system, which denies and delays justice, also helps in encouraging rent-seeking activities.

These are similar to rent-seeking activities except for the fact that their direct (immediate) impact is unproductive. Apart from this difference, both lead to ‘unearned’ income without adding to output. Both use real resources to generate profit (income) without producing an output. In other words, they lead to predation and not to production, and, as such, they do not enter the conventional utility and production functions. In their abbreviated form the directly unproductive profit-seeking activities are termed as DUP or even DUPE activities. Even organised religious activities sometimes amount to DUPE activities. (Srinivasan, 1991) These activities generally relate to government intervention. They may both be policy-induced (like, illegal trade, smuggling, and black-marketing) and policy influencing (like tariff-seeking by lobbies). There is a good amount of controversy whether DUPE activities are wasteful in their immediate impact (Bhagwati, 1982) or they are ultimately wasteful amounting to ‘immiserising’ outcomes. (Buchanan, 1980) n

REFERENCES

Aiyar, Swaminathan S. Anklesaria (2000), ‘Trickle-up, not Trickle-down’, The Times of India, Vol. VIII, No. 31, July 30, New Delhi.

Anand, V. ( 2001A), ‘Trickle-Down versus Trickle-Up: the Controversies and Rationales’, Mainstream, Vol. XXXIX, No. 27, June 23, New Delhi, India.

Anand, V. (2001B), ‘Poverty Syndrome: An Added Dimension of Concealed Poverty’, Mimeo.

Anand, Vinod K. (1996), ‘On New Political Economy: An Overview’, The Indian Journal of Economics, Vol. LXXVII, Part II, No. 305, October, University of Allahabad, India.

Bagchi, Amiya Kumar (1993), ‘Rent Seeking, New Political Economy and Negation of Politics’, Economic and Political Weekly, August 21, Bombay.

Bhagwati, J. (1982), ‘Directly Unproductive Profit Seeking (DUP) Activities’, Journal of Political Economy, 90, October.

Buchanan, J. (1980), ‘Rent Seeking and Profit Seeking’ published in Towards a General Theory of Rent Seeking Society, edited by James Buchanan, Gordon Tillock and R Tollison, College Station, Texax, A & M University Press.

Mohammad, Sharif, and Whalley, John (1984), ‘Rent-Seeking in India: Its Costs and Policy Significance’, Kyklos, V. 37.

Murphy, Kevin M., Shleifer, Andrei and Vishny, Robert W. (1993), ‘Why is Rent-Seeking so Costly to Growth?’ American Economic Review.

Panandiker, D.H. Pai (2001), ‘Corruption Shrinks Growth, Corrodes Economy’, The Hindustan Times, August 6, New Delhi.

Sane, Pierre and Binde, Jerome (2001), ‘Reclaiming Equality’, The Hindustan Times, October 31, New Delhi.

Srinivasan, T.N. (1991) ‘Religion as DUP Activity’ in Political Economy and International Economics, edited by Douglas A.Irwin, The MIT Press.

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