There is no denying the penetration of rent-seeking in the country. It is reflected in multiple forms and manifestations. The elite ie landlords, industrialists, top civil and military bureaucracy are all known for indulging in rent-seeking activities in one way or the other. They are the real beneficiaries of the system based on rents and privileges.
That is why even the noblest of initiatives to reform the system and revamp the institutions fail to produce desired results due to well entrenched interests that these reforms are supposed to hurt. The rent-seekers, who have amassed huge fortunes, encourage and support the system that promotes rent-seeking.
Rent-seeking has become so enmeshed in our economy and institutions that the state has almost lost its authority to effectively implement the social contract. It does not perform basic functions like law and order, efficient dispensation of justice and effective service delivery. The state cannot collect due taxes since rent-seekers have amassed power and authority whereby they bend the law in their favour.
Sometimes, it is not individuals who indulge in rent-seeking but groups and the organisations that collectively safeguard their interests. For example, some service groups in the bureaucracy will not let service reforms succeed with a view to keeping their pre-eminence in the system intact. Sometimes the rent-seekers in organisations unite to render organisational accountability ineffective.
What does rent-seeking mean? The term ‘rent-seeking’ owes its genesis to returns to land as the landowner received rents of land due to ownership and not by virtue of any effort or hard work. Later on, the term embraced monopoly rents etc – the profit gained by a monopolist by virtue of the monopoly and which would not have been possible to gain had competition not been hampered.
According to the Concise Encyclopaedia of Economics “people are said to seek rents when they try to obtain benefits for themselves through the political arena. They typically do so by getting a subsidy for a good they produce or for being in a particular class of people, by getting a tariff on a good they produce, or by getting a special regulation that hampers their competitors”.
Rent-seeking is essentially related to power. It implies that rent-seeking can be perpetuated through a nexus of power with various privileged groups. Such a symbiotic relationship is very visible in our system where the various elite have entered into an unholy alliance for rent-seeking.
The structure of rent-seeking in Pakistan is based on four main components: (1) subsidies, exemptions, regulations and licensing; (2) privileges by virtue of being part of some peculiar group or class; (3) concentration of land in a small minority which has not necessarily been acquired by hard work and effort; (4) special privileges to housing authorities and housing schemes of interest groups.
Pakistan has had a very rich system of subsidies, export vouchers and rebates etc from the very beginning wherein certain sectors of economy got preferential treatment by the state. The powerful business groups effectively lobbied for exemptions and favourable tax treatments.
Pakistan is one of the countries known for an SRO culture where businesses get exemptions from customs duty and taxes. Such legislative instruments have remained a big source of rent-seeking not only for the particular businesses but also for those who were directly or indirectly instrumental in the issuance of such SROs.
Rent-seeking was also made possible by enacting complex legislations amenable to prismatic interpretations, which became a source of rent-seeking for the public functionaries and the lawyers. The subsidies doled out to big state-owned enterprises (SOEs) like PIA and the Railways are basically a drain on the resources.
The second pillar of rent-seeking superstructure in Pakistan is related to the perks and privileges awarded to the civil service, particularly a few groups within it. Big residential houses at the district and divisional headquarters, and GORs located in the posh areas of the big cities are a big source of rent-seeking. They not only create distortions in the housing market but also cause discrimination among different service groups and cadres.
Theoretically, two government employees may be working on the same salary grade and entitled to the same perks and privileges such as accommodation and transportation. But in practice, one might be getting house rent insufficient to get a modest living in the open market, whereas the other enjoys himself with a government-owned accommodation spanning over kanals of land. The market rent of such an accommodation is generally several times higher than the house rent admissible to the other government employee.
Why is rent-seeking iniquitous? It is bad as it reduces efficiency of the economy and the institutions by hampering competition. Literature on the subject also tells us that it kills innovation.
Murphy et al in their paper titled ‘Why is rent-seeking so costly to growth?’ write “Public rent-seeking attacks innovation, since innovators need government supplied goods, such as permits, licenses, import quotas and soon, much more than the established producers. – innovators have no established lobbies and are not part of the government elite. Unlike the established producers, innovators are often credit-constrained and cannot as easily find the cash to pay bribe”. Thus the point is that rent-seeking dampens growth and discourages the establishment of new businesses.
Besides hampering competition and reducing efficiency, rent-seeking also deepens inequality in the society, as has been argued by Joseph Stiglitz in his book titled ‘The Price of Inequality’. He is of the view that rent-seekers get rich as resources move upward for their benefit but at the expense of the majority. It is now well established that inequality, if not taken care of as a conscious macroeconomic problem, is harmful for economic growth and development of the country.
What should be done to minimise rent-seeking opportunities in Pakistan? To begin with, all the concessionary and tax exemption schemes should be scrutinised critically. Preferably, they should be done away with immediately. If this is not possible, at least a sunset clause should be set to phase them out in the minimum possible time.
The privileges given to various housing schemes operating under public sector organisations should be withdrawn. All palatial government accommodations and GORs should be sold on the market price and house rents increased uniformly for all the government employees according to their grades. This will not only minimise distortions in the housing market but also bring about equity among the employees.
But to do so, wide-ranging aggressive reforms are needed. Minimising rent-seeking will not be a cakewalk due to its penetration. But it is also a fact that governance cannot be improved without meaningful reforms in the public sector and the economy that aim at reducing rent-seeking opportunities. The next government has its job cut out.
The writer is a graduate of Columbia University. Email: jamilnasir1969@gmail.com
Jamil Nasir, "Rent-seeking and governance," The News. 2013-04-06.Keywords: