Rents and rent-seeking: they can be good for your (economic) health

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A number of rents, and the rent-seeking which sustained them, played a critical role in the development of capitalism in the East Asian countries. Not only was the creation of rents critical for primitive accumulation and learning, transfer rents were critical for maintaining political stability even though the economic implications of these transfers varied significantly. The role of rents in economic development is worth stressing in the aftermath of the financial crisis of the late 1990s. The depth of this crisis led many economists to link the immediate economic woes of the regions to the systems of rents and rent-seeking popularly described as ‘crony capitalism’. The implicit counterfactual to ‘crony’ capitalism is a ‘genuine and impartial’ capitalism of free markets, zero rents, fair market-determined returns for everyone, and a minimal state which only maintains a level playing field. However appealing such a mythical capitalism may be, our discussion has been concerned to establish that such a model is not relevant for developing economies, and perhaps not for any economy. The relevant distinction is between rent-seeking systems which are developmental and those which are crippling. The relevant policy question is to understand how one may transform into the other…

…The long-run relationship between rent-seeking and growth is of much greater interest. If growth requires the management of growth-enhancing rents rather than the abolition of all rents, high-growth countries will always have rents and will therefore inevitably have to live with rent-seeking. Globalization and liberalization will not change this fundamental economic problem, nor is globalization or liberalization likely to succeed if policy-makers attempt to proceed on the basis of inappropriate no-rent market models. The no-rent model remains compelling not because the evidence supports it, but because its policy implications are much simpler to understand. Our analysis suggests that identifying the conditions which have in the past been conducive for growth is a much more challenging task. The conditions which allow value-enhancing rents to emerge and which limit rent-seeking costs vary from country to country because countries do not have the same political conditions and do not follow the same technology trajectory. This is where a deeper examination of the historical evidence is important to warn us against falling for seductively simple theories. There is no evidence in Asia, possibly no evidence anywhere, of long-run development taking place on a no-rent basis. Instead, the policy challenge is to construct and reconstruct institutions and politics in developing countries to sustain developmental rents and rent-seeking while attacking value-reducing rents and rent-seeking.

Mushtaq H. Khan (2000), Rent-Seeking as Process, in M.H. Khan and Jomo K.S. (eds) Rents, Rent-Seeking and Economic Development

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4 thoughts on “Rents and rent-seeking: they can be good for your (economic) health

  1. Correlation implied, but no causation demonstrated and certainly no prove that rent and rent-seeking are either a necessary or sufficient condition for development. let alone a necessary and sufficient condition. It’s basically advocating for trickle down economics as TINA (there is no alternative), which Pope Francis excoriated as a development model.

    Development requires organizational skills and capital, and those possessing such skills and capital generally have the economic power to extract rent if they so choose and are permitted to do institutionally.

    The author is arguing that rent is needed as an incentive but in reality the ability to extract rent boils down to distribution of economic power. That involves institutional arrangements that the powerful have the ability to influence.

    The correlation in the post assumes that only one approach to institutional arrangements is possible or available, whereas they may not be the case.

    • Thanks for your comment. The book that these two paragraphs come from makes a strong case for the potential for particular kinds of rents to accelerate development. Countries such as South Korea and Taiwan and earlier Japan employed industrial policies that favoured particular industries that did not possess comparative advantage initially but that in time became efficient and competitive enough to export successfully, and this helped drived rapid development for some time in all these countries.

      Similar policies were tried in South East Asia, with less success, due to the different political settlements (the balance of power between social/political groups) in those countries.

      It is argued that the so-called ‘learning’ rents helped accelerate the acquisition of knowledge as learning-by-doing in favoured industries and firms. Some states were able to credibly threaten to withdraw support if the relevant firms did not ‘grow up’ and reach a particular level of efficiency after a limited time.

      The book also discusses how political and institutional requirements for successful industrial policies will vary by country context, since technological trajectories and the political settlement will necessarily differ.

      The authors make the case that a historical approach to analysing the political economies of different countries is vital. I guess the quotes, taken out of context, may not make this clear.

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