Monday, 3 December 2012

Who is harmed by rent seeking?

Stronger government and stable and consistent policies help an economy to grow. This could be one of the reasons apart from the Green Revolution, Afghan aid and post 9/11 war on terror aid that we registered higher growth in the martial law eras than in democracy. The first 12 years of democracy, from 1987-99, were marked with lower growth since the governments were not strong enough, apart from 1997-99 PML-N’s heavy mandate government. However, in the end we all witnessed that nothing is more powerful than the army in Pakistan.

Irrespective of the form of government in Pakistan, the elites (smaller part of the economy) have a comprehensive hold on the economy through their (personal) links with the bureaucrats and politicians. Hence, these links are used to make extra benefits using their positions. If these benefits can be translated into monetary units then it’s called ‘economic rent’.

Economic rents are used, according to firms, to create more wealth and to distribute among the workers to provide benefits to them. Thus, the society gets benefits from economic rents through wealth creation, known as beneficial rent-seeking. However, this might not be the case in real. Firms make extra rent/profit and do not distribute (fully) among the workers or society, known as detrimental rent-seeking. Firms/ entrepreneurs involved in such activities are known as rent seekers.

Lobbyists around the world hired by firms/entrepreneurs, work closely with bureaucrats and politicians, to protect the firms’ benefits that hire them. They do not care about society even though they always argue that they are doing it for the betterment of society. Sometimes, the lobbyist is a member of a big association in which all the firms are registered, such as APTMA’s representative will be a member from ATPMA, etc. The sad part is that if these lobbies are very strong and the government is weak, then they can easily exploit the government to make policies in their favour. We have seen that in such a situation, the government becomes part of rent-seeking.

The government’s role in developing countries like Pakistan is inevitable when private sectors do not invest due to lack of entrepreneurship or lack of profitability and confidence in the economy. The government’s role is vital in case of market failures. However, it may end up with worse outcomes since it will affect its own benefits as well, which will lead to rent-seeking by the government. Thus, the concept of rent-seeking is not limited to private firms/entrepreneurs and the government could be a rent seeker as well.

Licensing schemes, in general, lead to corruption by authorities as bureaucrats or the officers on duty use their discretionary power to award license to clients. This may lead to rent-seeking in two ways: the government creates its own monopoly as it’s the sole authority that provides licenses to clients. Therefore, government officials appointed to do this particular job may be involved in taking bribes from clients and if clients give a bribe then the total transaction cost of producing or importing increases. Thus, consumers are charged higher prices, more than the cost of production, which leads to their exploitation. In the 1960’s and 1970’s, several licensing schemes were introduced for investors, importers and exporters in Pakistan.

Industrialists always demand protection for their industries so that they can enjoy inefficient production by producing at a higher cost than the world. They ask for subsidies to cover the implicit cost of their product due to higher taxes and thus higher input prices are used in the production processes. They ask for bans and other kinds of restrictions on the final products as they do not want foreign goods to replace their product in the domestic market. With the same token, tariff cascading, lower on raw material and higher on final goods, restrict imports of consumer goods into the domestic market. Consequently, people are deprived of consuming better quality products. Finally, tax holiday, which was given to industries in the 1990’s helped producers to seek more profits. But the extra profit was not passed on to the consumers, which implies rent-seeking by industrialists. All these policies are demanded by the lobbies of different associations/industries from the government that have detrimental effects on the society. Wealth generated from these activities goes into a few hands instead of creating wealth within society.

Pakistan’s entire population is around 185 million. The household size is around 6.8, which makes 27.2 million households in Pakistan. If the government announced Rs1 per kg subsidy on wheat flour due to increase in the prices of wheat and demanded by the flour mills and let’s suppose that if 10 kg wheat flour is consumed on average each month in every household, then the government needs to give Rs272 million subsidy to the wheat flour mills. On the other hand, if Rs10 is given to each household, it will be evenly distributed among the 27.2 million families instead of Rs272 million distributed among a few wheat flour mill owners. Thus, whenever producers ask for subsidies, they get benefits in millions at the cost of few rupee savings of each household. These policies could be very sound politically but in the end, the society is not benefitted from them and a major chunk of money goes into the hands of rent seekers.

Among rent seekers, the automobile sector takes the top spot. They have been protected by high tariff rates for more than two decades now. They are still insisting that policymakers provide them more protection. Are they close to being competitive in the world market or is their sole objective rent-seeking? Since infant industry argument does not tell to protect the industry forever, we need to decide now whether it’s favourable to protect the auto sector or to start investing in some other industry, which will be beneficial for the country and society in the long run. Local assemblers were asked to follow a deletion programme and they were to achieve specific targets of deletion each year. However, the deletion process is quite slow and each year they ask for more protection. They have been facing little competition due to used car imports. Although the imported used cars are five years old, which have on an average close to 80,000 mileage, people sill prefer buying old cars than new locally manufactured cars. Local car assemblers are going to the National Tariff Commission on Nov 22, 2012 to discuss the tariff rate on old and new cars. It’s expected that they will ask for increasing used cars’ tariff rates and not allow the import of five-year-old used cars, instead allow the import of three-year-old cars.

Competition and distortions are two important terms here. Any kind of distortion may lead to rent-seeking by the principle (government) or the agent (lobbyist), which will not benefit the society. Similarly, anything that leads to go away from competition helps rent seekers to seek more surplus from consumers, thus increasing their own wealth by decreasing the society’s wealth.

rent-seeking can also be quite costly to economic growth. Since rent-seeking results in more returns for firms/entrepreneurs, it attracts more rent-seeking activity. rent-seeking activity takes away from competitive equilibrium, thus leading to lower output level. Therefore, it results in lower economic activity and lower growth rate. Moreover, it hurts innovation through lower expenditures on R&D. Since innovation or technological advancement is the core to economic growth, rent-seeking adversely impacts economic growth. As it’s mostly done by the elites or top 0.1 percent (according to income) people, it creates severe income inequality as wealth is not distributed among society. Some people argue that rent-seeking is analogous to theft because in theft thieves take your money with them and in rent-seeking again, certain people take a chunk of money with them and the rest do not receive anything.

Despite several problems in the economy, we need a ‘big push’ from specific investors to invest more in the country so that the economy is back on the growth track. However, this policy of development economics will lead us towards rent-seeking. Hence, there’s a need for long-term policy measures -- call it ‘slow and steady push’ -- which has regulations for anti rent-seeking and everyone has a level-playing field to contribute to the economy. In order to get rid of rent-seeking, we need to abolish the Statutory Regulatory Orders’ system, prepare a tariff rationalisation structure in such a way that we’ll drop the normal maximum tariff to zero in the next few years, give a specific timeframe to all the industries that are being protected for the last many years to become competitive, introduce no new quotas and bans on any product and finally, limit the government’s role in investing in those activities where the private investor can invest. Moreover, the government should focus on providing law and order, justice, property rights, basic infrastructure and ensure that competition prevails in the market.

Sunday, 25 November 2012

Some new Lessons learnt based on Empirical Findings at the 28th PSDE

In the first paper causal link among growth, private investment and public investment is checked. One of the most interesting result came out of the study is that public investment crowds out private investment which is contrary to the previous studies which shows crowding in hypothesis, i.e., public investment crowds in private investment. After this paper government should stay away from investing in all those sector where there is a chance for private sector to invest. 

In two another papers on external debt and growth, both the studies came out with negative long run association between growth and external debt. They found the existence of debt overhand due to which external debt hinders growth. 

An interesting find in one of the papers (Ali and Mustafa (2012)) is that labour is negatively associated with the GDP in the long run, which to me is a absurd results. I think it is due to the problem of endogeneity since labour is taken as exogenous variable but it is an endogenous variables and should be treated endogenously. Another paper (Qayyum and Haider(2012)) treated it endogenously since they estimated the model with system GMM and came up with positive coefficient of labour. 

In the same session last paper did a critique on the FRDL-2005. the paper concluded "FRDL was implemented to improve overall fiscal discipline int eh country so as to put the country on the desire path of economic growth. The FRDL was not frame on the basis of overall economic situation of the country rather it was framed on the basis of constitutional provision. The jurisdiction of FRDL is only the federal government and provincial governments are not in the jurisdiction". Qasim and Khalid (2012).

1. Public-Private Investment and Economic Growth in Pakistan: An Empirical Analysis
Maryam Bint-e-Ajaz and Nazima Ellahi
Kashmir Institute of Economics, University of AJ&K, Muzaffarabad and Foundation University, Islamabad
2. External Debt Accumulation and its Impact on Economic Growth in Pakistan
Rifaqat Ali and Usman Mustafa
Department of Education, Attock and Pakistan Institute of Development Economics (PIDE), Islamabad
3. Foreign Aid, External Debt and Economic Growth Nexus in Low Income Countries: Empirical Evidence from Pakistan
Unbreen Qayyum and Adnan Haider
Pakistan Institute of Development Economics (PIDE), Islamabad and State Bank of Pakistan, Karachi
4. Fiscal Responsibility: A Critical Analysis of FRDL (2005) Pakistan
Muhammad Ali Qasim and Mahmood Khalid
Pakistan Institute of Development Economics (PIDE), Islamabad.

Friday, 16 November 2012


Wednesday, 25 July 2012

Patience in Islam

Sabar or patience in Islam has significant role. It makes a muslim better muslim if he deal things with patience. Patience in dail life has several meanings such as if a person is ill then he should not scream or shout. Similay at the times of death of loved ones and some serious setbacks we need to deal situations with patience. Moreveor, dealing with younger ones we need to be patient because they are younger than us and we can say anyting to them doe snot mean we should sya it; deal it with patience.
I saw sometimes in the offices that people deal with their personal staff with so arrogance and their behavior is so snobbish that they forget that they are muslims and what Allah (SWT) has asked them to do. But their Egos at that time is more important than anything else.
I am writing all this becasue I was fasting today and I thought I'll not get annoyed at anyonne but still I screamed couple of times of some people and after screaming I thought if i would not had screamed the matter woulld have solved either way. Does that screaming or losing patience benefits me in anyway... my answer is NO. But it pleased my Ego at that time.

"A Muslim does not suffer any mental or physical anguish, or any distress, grief, pain or sorrow - even from the prick of a thorn - except that Allaah expiates his mistakes and sins." Bukhaari and Muslim

This Sabr is an extremely important virtue for a believer. The Prophet sal-Allaahu alaihi wa sallam, talking to some poor Muslims from Ansaar whom he had given whatever he had, said:

"Whoever practices Sabr, Allaah Subhanahu wa Ta'alaa gives him Sabr. And no one can be given anything better or more far-reaching (comprehensive) than Sabr." Aboo S'eed Khudri in Bukhaari and Muslim.

For more to read see

Monday, 16 July 2012

Islam and Consumerism

First of all I must confess that I do not have command on the subject but I wanted to get comments/feedback on this. Consumerism in Islam; Is it allowed or not allowed but 1.6 billion Muslims around the world are buying and selling different things as written in this article

I was surprised to see a statement in this article "Religions rarely praise consumerism". First question arose on my mind was "What is Consumerism" Is it a law of protecting consumer rights or Is it creating a market and culture of consuming more and more whether you have money in your hand.

Therefore, I started searching some websites/webpages, Thanks to Google for making our life easier, that whether it is true in case of Islam or not. However in the end I saw a Wikipedia page on Consumerism which defines Consumerism as "The term "consumerism" was first used in 1915 to refer to "advocacy of the rights and interests of consumers" (Oxford English Dictionary) but in this article the term "consumerism" refers to the sense first used in 1960, "emphasis on or preoccupation with the acquisition of consumer goods" (Oxford English Dictionary)". Moreover it says "Consumerism has long had intentional underpinnings, rather than just developing out of capitalism". Thus it is nothing to do about capitalism.

Islam says do not spend on those things which you do not need, live simpler life, do not waste food, conserve water... In short be modest in your spending. But on the other hand it also says that give charity to others so that they can also buy good for their use. It also says that wear good clothes so that one knows that you are well off and if someone wants help (monetarily) he/she can ask you. 

Consumerism always invited innovation because more society is innovative people tend to buy newer thing, e.g., iPod, iPad etc. Islam is pro innovation and not against new technologies and if someone is working on the betterment and people are adopting those goods, then it is a increase in consumerism. 

Above short explanation shows that Islam asks people to being modest but it is not against consumerism. If we read between the lines what Islam teaches us then I do not agree with the statement that Religions rarely praise consumerism. However, I cannot say anything about Christianity or other religions.

Sunday, 22 April 2012

Financial Crisis under Islamic Finance

The below strategy is at evolving stage...

Interest is prohibited in Islam however, we can take profits from the investment. Who'll share the risk is the main question. In conventional interest based system the entire risk is forwarded to the customers who borrows from the bank and then bear the entire risk. In an Islamic finance framework lender and borrower both has share in profit and risk, still it depends on the agreement between the two parties. Thus Islamic finance has lesser instability than interest based finance since lender is also careful of lending to the risk seeker person.