What is "rentseeking"?

Rent constitutes earnings made without any human effort such as labor. Alternatively, rent is the income that derives from the possession of an entitlement. The earliest examples of rents were where a title such as a "Duke" or a "Nawab" allowed the titleholder to collect fees on the lands that were gifted to the individual along with the title. Even today, income from real estate holdings is referred to as rent.

The main aspect of rent is the fact that the mere possession of the title allowed non-labor income to be derived, ie., income has been obtained without the individual having actually putting in any work effort. Ever since the creation of the state as form of organization of human society, people have recognized the ability of the state to confer rents on individuals. Romantic tales are full of heroic deeds, the rewards for which were castles and lands that allowed rent to be collected for a lavish lifestyle for the hero. As a result, many of these tales begin with the miller's son going to court to seek a way to perform a heroic deed and obtain his rents. This miller's son is the earliest form of the rentseeker.

As the name implies a rentseeker is someone whose efforts are all directed towards obtaining rents or non-labor income derived purely from entitlement. Since human effort is always directed towards building a nestegg for retirement, what distinguishes rentseeking from this normal behavior? A person could work and save for a considerable period of time to be able to buildup some form of real estate or investment holdings to be able to collect non-labor income that will allow him to retire.

A rentseeker is distinguished from this individual by the fact that the rentseeker will not attempt to work for anything other than the creation of a rentseeking opportunity. All the rentseeker's efforts are directed towards the creation of a rentseeking opportunity for himself. These efforts are directed towards the government which by conferring some license or monopolistic advantage would allow rents to be collected. Consequently, the principal form of activity for the rentseeker is the cultivation of government officials who provide the information and the entitlement for rents. Another important feature of rentseeking activity is that none of the rentseeker's activity is productive. In actual fact the creation of rentseeking opportunities could lead to counterproductive activities such as wasteful and inefficient use of resources. For example, useless and expensive government purchases may be one method for obtaining rents. Unfortunately, the byproduct of this approach would be an unnecessary increase in greater expenditures and eventually an increased tax burden for the people of the country.

Causes of rentseeking

As developing countries gained independence, the state assumed a large role that included diverse activities such as leading development, eradicating poverty, and providing social benefits. Given this large role that had been defined for the government, the state acquired control of a large portion of the country's resources. Planning of development also provided it with a mandate for increased control of resources as well as large powers of directing resources within the country. For the latter task, licensing, credit controls and other regulatory and control procedures were set up.

The growing state was endorsed by all factions of society as a necessary means of achieving the promise of prosperity. In reality, it served to increase the rent conferring powers of the state. The state could take resources from the people in general, and provide them to its favorites. It could dole out licenses, or distribution agencies for publicly produced goods, or cheap and preferential credit and grants, or route permits ostensibly for development. In reality, however, these worked primarily as means for collecting rents for the few who could obtain such favors from the government.

Rentseeking activities

Rentseekers are not necessarily idle. In actual fact a lot of them are expending a considerable effort in attempting to create a rentseeking opportunity for themselves. Networking or the cultivation of contacts to that effective rentseeking may ensue is, by now, a fine art. Children are taught at an early age that the mastery of this art is far more important than the gaining of an education. Births, marriages, eids, basants, and funerals are all alike an opportunity for cultivating contacts, contacts that can be called upon when rentseeking opportunities arise.

Over the years, an important activity that has emerged among the class of those well-connected to the government, is that related to gaining wealth by means of those connections. These activities range from outright influence-peddling and corruption by government officials to selling goods to the government and obtaining government contracts at inflated prices.

Quite often, individuals are given monopolies by means of government licenses. Numerous individuals have collected titles to textile mills, sugar mills, oil mills, route permits etc. by this means. In some cases the mere paper on which the permit was granted was sold at an enormous profit. The paper normally grants a monopolistic, or at the minimum an oligopolistic position, to the holder. By ensuring that potential entrants were precluded, the licensee was granted the right to earn large profits.

Cheap credit is made available on projects which have been inflated beyond reason. Often the project is abandoned and yet none of the arrears on the debt are ever collected. The banks that have been forced to promote such rentseeking activities will ultimately have to be shored up at the expense of the taxpayer.

Often, the licensee is provided tariff protection as well as cheap, preferential credit. By this means he is able to charge a still higher price to his captive market since external and internal competition is ruled out by fiat.

Costs of rentseeking

The issue really is that no matter what the effort, such activity is unproductive and, quite possibly, costs the taxpayer. Stories of tenders that have been fattened because of commissions of the various rentseekers are perennially making the rounds. Sleek consultants are lining the lobbies of donor agencies and planning commissions doing studies that never see the light of day. The indenters or the tender-makers are always living very ostentatiously and using all their wealth to cultivate government contracts. Some may not even fulfil their contracts. Others provide substandard service or manage to win a tender with the highest price. Yet they grow rich and the people are left holding the bill for a shoddy service.

Rentseeking has virtually paralysed the state. There are so many people out for rents that there seems no other activity in town. Work-ethic stands totally discredited for the fruits of a hard-working life are by far outstripped by a short and successful rentseeking career. The signals that are, therefore, sent to the aspiring youth are to move towards the more productive career of rentseeking rather than a life of labor and toil.

Measures against rentseeking

Most societies seek to limit rentseeking and other such unproductive activities by means of legislation and the enforcement of such legislation. In most developing economies it has been found to be very difficult to enforce existing laws especially against the elite. The state is unable to function against the excesses of the rentseeking elite. Consequently, legislation and the threat of enforcement of such legislation may not be an effective check to wasteful rentseeking activities.

What then, would be the approach to limiting rentseeking in the context of a developing economy where the state is in decline? To begin to answer this question, note that this activity is thriving mainly on the basis of the excessively large role of the government in the economy. Regulation, licensing, credit rationing, tariff protection, price setting, and other monopolistic titles are all being exploited for rents. The excessive expenditures of the government are being considered a fair game for either direct embezzlement or misuse by the rentseekers. An effective solution would, therefore, involve a redefinition of the role of the state.

A reduction in government controls, and a reduced role of the government in the production of goods and services and a greater reliance on market forces will place all individuals at the mercy of the market and hence force them to work for a living. Moreover, increased competitive forces in the domestic market, including subjecting the domestic industry to external competition would ensure efficiency in all economic transactions. In turn, the industrialists who are forced to compete at home and abroad, will demand an end to rentseeking since such unproductive activities serve to increase the tax burden, and hence the costs, of all producers.

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