An Excerpt from:

Both Pretense and Promise: 
The Political Economy of Privatization in Africa

by S. Tjip Walker

 
Chapter 3
Rents, Rent-Seeking, and Rent-Seeking Regimes

Rents

I use the term "rent" in the traditional economic sense, but I apply it in a distinctive way. Economists since David Ricardo have defined rent as a return to some resource in excess of what is required to call it into use. It is a surplus received by the owner of a resource. The concept was initially applied by Ricardo and other classical economists to naturally occurring resources, particularly land. Ricardo noted that as the demand for foodstuffs increases, more and more land is brought into cultivation. However, where there is a fixed stock of land, it is generally the case that the natural fertility, and hence the yields, of the new land will be lower than that of more established farms. If prices are high enough to make it profitable to farm the more marginal lands, then the returns on the more fertile lands must be substantial. The owners of the more fertile land are thus receiving a surplus--a rent--on their resource. It bears noting that it is the relative scarcity of the fertile land that creates the rent. If all land was equally fertile, then there would be no rent earned on the resource. 
 

Contemporary economists have been more concerned with the rents accruing to resources that are socially constructed, such as patents. In this instance, an "artificial" scarcity is created by writing rules that limit the number of producers of a particular good for a period of time. This rule allows the patent holder to act as a monopolist and reap higher-than-competitive prices (rents) on the sale of the protected product. Since the mid-1970s, a number of economists, including Anne Krueger, Gordon Tullock, and Robert Tollison, have expanded the discussion of rents to encompass a wide range of resources where a government creates an artificial scarcity by enacting rules that limit access (see Buchanan, Tollison, and Tullock 1980; Rowley, Tollison, and Tullock 1988). In her classic article, Anne Krueger ([1974] 1980) focused on quantitative trade restrictions (import and export licenses) that limit the access of foreign firms to domestic markets. Others have looked at rents associated with such resources as taxi medallions, professional examinations, and crop production subsidies (Buchanan, Tollison, and Tullock 1980; Rowley, Tollison, and Tullock 1988). 
 

Rent-Seeking

In addition, these economists have expanded their focus beyond the welfare effects of the rents themselves to an examination of the myriad costs associated with 'seeking the rents'.(1) Rent-seeking refers to the various efforts (and costs) associated with creating and gaining access to a scarce resource. From this perspective, rent-seeking includes the lobbying efforts of private actors to get the government to prescribe rules that create a valuable resource (a patent, a license, a subsidy) from which rents can be extracted or to interpret existing rules to enable access to such a resource. Broad though the notion may be, it is important to recognize that not all behavior labeled corrupt can be described as rent-seeking. For example, the outright theft of government property cannot be considered rent-seeking. However, as it is the creation of rent extraction opportunities, more than theft, that characterizes African political economies, rent-seeking is a fully sufficient concept around which to organize an analysis of political regimes. 

Empirically, it has proven difficult to measures the costs of rent-seeking conclusively. The estimates that do exist show the cost to be significant. For example, Krueger ([1974] 1980) reports that in 1964, the costs of trade-related rent-seeking amounted to 7.3 percent of India's national income. Further, the analysts of rent-seeking are quick to underscore that since rent-seeking is devoted to carving up an existing wealth pie and not to making it larger, such activity is seen to be inherently unproductive. James Buchanan (1980: 4) puts it this way: "rent-seeking is designed to describe behavior in institutional settings where individual efforts to maximize value generate social waste." 

The analysis of rent-seeking has been applied to the African context. Mark Gallagher (1991) calculates that cost associated with lobbying for and enforcing various trade and monetary restrictions (exchange and credit controls) ranged from a low of 7 percent of GDP in Niger to a high of 37 percent in Lesotho. He also argues that efforts to capture rents have distorted economic performance and lowered overall growth. 
 
 

Rent-Seeking Regimes

Moving from a discussion of rent-seeking in general to consideration of a rent-seeking regime changes the usual focus of rent-seeking analysis. Where the standard rent-seeking approach concentrates on the activities of the private sector entrepreneur, I focus on government officials. Within the standard rent-seeking approach, rent is extracted by the entrepreneur through access to some protected market. Similarly, rent-seeking consists of the actions taken by the entrepreneur to secure the grant of a protected market. In this view, the entrepreneur is the actor, the one with the initiative. The government official is largely passive. Instead, a rent-seeking regime presents a mirror image: an active governmental official and a largely passive entrepreneur. 

From this alternative perspective, a patent, licence, medallion, or other sort of administrative authorization represents a right to perform some sort of economic activity. That right is a resource and it has value. If a government official has been given discretion over the allocation of that right, then he can sell it to one or more entrepreneurs who value it. Most governments have regulations prohibiting officials from receiving payments for the exercise of administrative discretion. Hence, to the extent that the government official pockets any payments for these administratively-constructed rights, he is extracting a rent. 

From this vantage point, rent-seeking refers to efforts by government officials to prescribe and enforce rules that give themselves discretionary control over the allocation of valued resources. Rent extraction occurs when a government official uses the discretion he has been granted for his personal benefit. Although private entrepreneurs may also benefit from the transaction by gaining access to the valued resource, from this perspective it is the official who is the instigator, the motive force. A rent-seeking regime is one where the defining characteristic of governance, the end to which all political activity is ultimately directed is the creation and control of rent-extracting opportunities. Such rent-seeking regimes, I submit, are found throughout Africa. 

While the prospect of rent-seeking regimes may be fairly novel among analyses of African politics,(2) it has received some attention from political economists. Susan Rose-Ackerman (1978) was perhaps the first. In her study of corruption, Rose-Ackerman (1978: 179) offers this insight: "[s]ince bureaucratic structure will help determine the volume of corrupt gains available to agency heads, corrupt top bureaucrats will often have strong incentives to alter bureaucratic structures in order to facilitate corruption." She then devotes an entire chapter to exploring the kinds of measures such a rent-seeking government official would take to increase the flow of rents. More recent analyses by Shliefer and Vishny (1993) and by Kiser and Tong (1992) have extended Rose-Ackerman's analysis. Each of these studies contributes to the discussion of the logic of rent-seeking regimes found later in this chapter. 

Before concluding this initial discussion of rent-seeking regimes, it is worth elaborating a bit about what I mean and do not mean by elevating rent-seeking to the first rank. This is necessary because of the highly-charged atmosphere that has accompanied earlier efforts to analyze rent-seeking activities in Africa and other less developed regions. As Robert Klitgaard (1988:7, 9) has lamented, "corruption is devouring the economies and polities of many Third World nations...[yet] partly to escape being labeled imperialists (or racists), many present-day scholars have simply avoided sensitive topics like corruption." The consequence has been what Stanislav Andreski (1979) has called "a conspiracy of silence." 

There is evidence that the "conspiracy of silence" is waning. More attention worldwide is being given to controlling corruption. However, as long as the analysis is framed in terms of corruption and not in terms of rent-seeking, there is little prospect of forward progress and a real danger of slipping backwards into silence once again. The problem with most analyses of corruption is that they tend to focus on attributes of individuals: do people in country X have the moral fortitude to withstand the temptations of bribes and kickbacks? Such a focus can quickly become colored with moralistic overtones that in turn can degenerate into charges, especially in Africa, of racism--real or imagined. 

By contrast, the rent-seeking approach focuses attention immediately on the real nub of the problem--rules. It is not that individuals are unimportant. But the view is one of examining how individuals respond to the incentives created the existing rules; rules that give rise to the specific rights, contracts, jobs and other valued resources as well as creating the bureaucratic discretion that makes rent-seeking (corruption) possible. This emphasis on rules means that more significant than the sale of licenses and other forms of administrative authorization are the rules that have been established to create the licenses and authorizations in the first place. More important than the existence of kickbacks to secure a contract is the existence of government contracts and contracting procedures which make the kickbacks possible. Of greater interest than nepotistic hiring or promotion are the civil service rules that allow officials to trade a government job for cash or personal loyalty. 

This approach also avoids the 'fallacy of composition'. Thomas Schelling (1974) was one of the first to make the observation that it is inappropriate to attribute to individuals the characteristics of organizations of which they are a part (or, for that matter, to attribute to organizations the traits of the individuals that make them up). In this context, it is a fallacy of composition to characterize the individuals who work for a rent-seeking bureaucracy as individually venal or morally suspect.(3) Yet, even aware of the fallacy of composition, it is all too easy when using a morally tinged term like corruption to apply it to individuals and organizations alike. Rent-seeking, on the other hand, only makes sense and can only exist in an institutional context. The focus is not on individuals, but on the institutional arrangements--the structure of the rules--in which they operate. As has already been noted, under a perverse set of institutional arrangements, rational behavior becomes corrupt behavior. 

Finally, it is important to recognize that by emphasizing the character of rules rather than the character of individuals, the rent-seeking approach is not a return to the arguments made by some analysts in the late 1960s and early 1970s that corruption is functional (Leff 1979; Nye 1979). Whatever the label--rent extraction or corruption--the sale of governmental discretion for personal gain is debilitating and distorting. To be sure, under certain circumstances, pay-offs and kickbacks may be a necessary evil. For example, where rent-seeking regimes prevail, it may be necessary to pay bribes in order to undertake productive activities. But, as numerous studies have demonstrated, a sizable flow of rents into the pockets of government officials distorts policy, promotes unproductive activity, reduces investment, stunts economic growth, skews resource distribution, and undermines popular sentiments toward social institutions.(4) So while pay-offs under these circumstances may be necessary, the evil of the rules that make it so should not be forgotten. 
 

Notes

1. Buchanan, Tollison, and Tullock (1980) collect a number of the earlier contributions to this research program, including Krueger's ([1974] 1980) seminal article. Rowley, Tollison, and Tullock (1988) contains a collection of later contributions. See also Meuller (1989: chapter 13) and Rose-Ackerman (1978).

2. Both the classic work by Bates (1981) and the recent examinations of the dynamics of African 'rentier states' by Boone (1990, 1994) and Lewis (1994a, b) incorporate rents and rent-seeking. However, these authors still see the creation of rents as a means of patrimonial governance and not an end. Thus, though this work extends that of Waterbury (1979) and Joseph (1987), it still does not make the leap to argue that rent-seeking has become the end of African governance.

3. The application of the fallacy of composition argument to corrupt bureaucracies was initially developed by Klitgaard (1991: 120).

4. Klitgaard (1988: 21-48) provides a complete summary of the "functional corruption" arguments as well as an equally thorough critique. Ekpo (1979a) collects several of the contributions to the "functional corruption" argument as well as a number of more critical views including Andreski (1979), LeVine (1979) and Waterbury (1979). Additional critiques of the functionalist position can be found in Gallagher (1991) and Shleifer and Vishny (1993).