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Rent seeking, or gold-digging?

  9:13

In part four of our anti-corruption handbook, Miloslav Kala looks at ‘rent-seeking’ — changing the economic rules to ones advantage

Research shows that, in some ways, those using a ‘grab as much as possible’ strategy are ‘less risky’ than those seeking re-election. foto: © ČESKÁ POZICEČeská pozice

I was inspired to write this article by an SMS: “It’s a good idea to explain corruption and develop a debate. And you should include an assessment of public tenders … – your friend, a.k.a. an expert witness!” One hundred and sixty characters were all that was needed to show how “rent-seeking” works in practice.

Rent-seeking deals with the concept of economic rent — payment for goods and services. A simple definition is that someone is rent-seeking when he tries to manipulate the economic environment so the rules play to his advantage when it comes to getting income from goods or services.

Administrative corruption, which happens when implementing the existing rules, represents bribes when applying for public contracts, directing tenders or funds so that family members or economically associated people gain from them, abusing one’s position for personal gain. The idea is to buy an exception to the rules.

Besides this, groups or individuals try to influence the state to their advantage. The World Bank calls this “state capture” and even defines the groups that want to capture and those that are usually captured.

Using the state as your agent

Associate Professor Eva Klvačová wrote an excellent article on this called “The Phenomenon of Rent-Seeking and its Effect on Czech Public Finances.” I will quote: “While neo-liberal theoreticians argued about how much a state is necessary for an economy to work properly, arriving at the conclusion that the need for a state is quite minimal, the practitioners of business activities came to see that it can be very beneficial to use the state as their own agent.”

The competition for customers has turned into one of gaining economic rent from the state, if possible without doing a thing.

The competition for customers has turned into one of gaining economic rent from the state, if possible without doing a thing. Competition has changed into an attempt to gain a monopolistic or dominant position, if possible for ever. And then never compete with anybody again. Interest groups refuse to respect the existing rules and the role of the state as a judge; on the other hand, they lean on the state to change the existing rules influencing it in their own interests.

“A description of the true working of a state — and by no means just the Czech one: the state ends up chaotic, scatterbrained, like an institution that often has little idea what it is doing and can be jerked from one side to another.”

In today’s society, is it possible to prevent the strongest rent seekers from threatening the social contract? If so, then how? It is precisely these questions — put forward by Klvačová — that the political parties’ programs should answer. They should, if the interests of economic groups had not infiltrated even there.

Put simply, as soon as one Pandora’s Box is opened, it is very difficult to overcome the resistance of those benefiting from public resources as they invest everything into maintaining their position and retaining the financial flows. For that matter, it can be seen during debates on restricting food vouchers, building savings plans, housing support, etc. To distinguish fair arguments from the misleading, though better packaged, ones is no trifle.

An important understanding is that the same rules apply to everyone, and there must be a judge to enforce and champion them. During a gold rush, the free-for-all rule could possibly be applied, but a modern state should seek inspiration in other periods.

Capitalism that kills competition

On the other hand, it is clear that economic groups’ influence on today’s states is huge. The pressure they exert is manifested in such fundamental areas such as tax systems, mandatory social expenditures, investment incentives or other expenditure programs. And it is only now and then that someone comes forward to put a name to this. For instance, last September it was Vince Cable, the British Liberal Democrat, who let loose on the banks and bankers.

He called the bankers “a greater threat to the British economy than the unions” and, as a liberal, he vindicated the state’s interference into private business in a situation where “capital is leaving the banks as bonuses.” Can you imagine the fear in the City of London when he announced a war against “killing competition capitalism” calling managers “gamblers threatening our economy”; especially when he is speaking as a member of the British government?

A new phenomenon has appeared … besides rent-seeking there is now rent-creating.

In connection to this, it is good to bear in mind that the public judges politicians primarily on their pre-election promises. The level of agreement between the policy employed and the promises made indicates the politician’s level of trustworthiness. Unfortunately, this state says nothing about the costs for realising these promises.

Recent research by David Bartolini, Domenico Scalera and Alberto Zazzaro monitored the behavioral strategy of politicians/officials and their influence on the extent of rent-seeking. The research showed that, from this aspect, those that use a “grab as much as possible” strategy are “less risky” than those that follow a re-election strategy.

Recently a description of a new phenomenon has appeared in the literature, besides rent-seeking there is now rent-creating.

To return to the proposal to regulate the offer prices of public tenders using a valuation pursuant to the Property Valuation Act, I think that for the needs of the institute of public tenders, it is necessary to use the services of experts, and I didn’t mention this in the article. The key question is, of course, comparing the percentage such an arrangement would lower the price of the tenders. I have started looking for the answer to that question.

Next: Public-private partnerships - PPP

Other articles in the anti-corruption series:

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