Rent-seeking & economic change in the Philippines

Posted: March 19, 2010 in Political economy

I. Introduction

In the late 1990s, the rather esoteric concept of rent-seeking has earned an exalted place not only in academic discourse in the Philippines but also in its political lexicon.  It has invaded no less than the State of the Nation address of President Fidel Ramos and is a familiar theme in the various speeches and articles of his national security adviser, Gen. Jose G. Almonte.  Rent-seeking has emerged as a staple explanation for Philippine under­development, a status previously enjoyed by a more primitive but related concept–graft and corruption.  Notwithstanding the concept’s currency, a more rigorous examination may be in order.   In this think piece, the right, nay a privilege, to be as venturesome as possible is claimed. The intention is to offer an initial framework by which one can understand how rent-seekers in the Philippines originate, pros­per, and “pass away.”  Specifically, we intend to probe the question: how are rent-seekers transformed into profit-makers?

Such transformations have been going on within the Philippine economy for quite a time.  Empirical studies centered on elite families since the 1960s up the present (Simbulan: 1965; McCoy: 1994) support this notion and had helped firm up the theoretical propositions that follow.  Another impor­tant but related question is to inves­tigate if the family remains the principal vehicle for either rent-seeking or profit-making.  It is our initial contention that there is movement away from purely or mainly relying on the family toward mobilizing other vehicles such as the public office, the private firm, the political party, the Church, etc.  Whether this movement away from the fami­ly is concurrent with, or even contingent upon the change from rent-seeking to profit-making is another matter to look into.

And lastly, another family of questions will concern the state.  In so far as one rec­ognizes the state’s central role in the creation of rents and rent-seeking opportunities, he may equally be interested in the same agency’s role in rent elimination.  More particularly, we are interested in finding out which factors will move the state to­wards this direction.

II. Definitions and Initial Propositions

“Rent-seeking” and “profit-seeking” are theoretical con­structs devel­oped by the public choice school, i.e., that group of theorists who specialized in the study of  “state failure”, as opposed to the development economic school which specialized in the analysis of “market failure”.

In its simplest formulation, “profit-seeking” is the pro­duction or repro­duction of economic wealth   primarily through economic, i.e., market mechanisms while “rent-seeking” in­volves the use of non-market, i.e., political, religious, cultural, etc., means to achieve economic ends.  The existence or creation of rents is often attribut­ed to state action that artificially restricts or eliminates competition. This action in turn stimulates private actors to attempt inducing government officials to allocate rents in their favor.  When a monopoly rent exists in an economy, resources equal approximately to the mono­poly rent will be wasted in directly unpro­ductive activi­ties (i.e., lobbying, bribery, political intimida­tion, etc.)  that serves to capture the said monopoly rent.[1] These resources are considered wasted because they could have been employed in more productive ventures.  The time and talent that entrepreneurs use in rent-seeking also have alternative uses.

As economic actors realize that extraordinary incomes could be earned with stra­tegic government posts, valuable resources will also be used to capture these public posts.  Other social costs in­clude the dampening of the entrepreneurial spirit and the development of a perverse  “make-do” culture.  Other observers also point out to the wasteful “cat-and-mice” games between rent-seekers and bureaucrats (similar to those played out between central planners and enterprise managers in Soviet-type economies).  When government regulations create rents, the normal economic reaction of private actors is to use all means–legal, extra-legal, or illegal–to capture them.  In response, governments will for­mulate and imple­ment more complicated regulations and employ larger bureaucracies supposedly to deter private seeking.  All these will simply make the rent opportunities more valuable that private actors are willing to expend more resources to obtain them.[2]

Another inefficiency, identified by Campos (1992), results from the political instability caused by rent-seeking.  If battles over capturing the rents result in frequent changes in power among elite factions, punc­tuated by coups and other irregular means of transferring power, the same elites deve­lop a short-time horizon and long-term investments will be in short supply.

But even the public choice school is not entirely unequivocal about the ill effects of rent-seeking.  Buchanan (1989), for instance, cau­tions us against a mindless worship of  market effi­ciency.  He raises the interesting point that since perfect markets are imaginary, how could economists use an alleged outcome (i.e., ef­ficiency) of such fairy tales as evaluation criteria? Indeed, as Wade (1992) pointed out, neoclassical theory admits that even markets that operate without go­vernment in­terfer­ence may expe­rience failures due to externalities, uncertain learning gains, com­plementarities, imperfect capi­tal markets, and economies of scale, scope, and time.

The source of the ambiguity is the distinction made between rent-seeking in a more competitive economic environment  and in the context of monopoly.  As it is, competitive rent-seeking stimulates aspiring private actors to “waste” resources in bids to capture rents.  This means that the more competitive the rent-seeking environment is, the more competitors there will be and the more resources will be frittered away.  In an ironical twist, some economists (Vishny and Shliefer 1993) argue that a less-competitive rent-seeking environment is less wasteful.  Stretching the logic to its full extent, they believe the least wasteful situation is one where an absolute dictator, who will brook no complaint, will dispense rents as he sees fit.[3]

Consistent with the precepts of neoclassical theory, it is asserted by others that a more competitive situation will reduce the wastes normally associated with rent-seeking and lead to efficient rent-seeking.[4] Ekelund and Tollison (1981: 18-19) acknowl­edged that rents in a more competitive situation provide “the incentive for resource owners to seek out more profitable (and thereby more economically efficient) allocations of their resources.” Hence, Jomo and Gomez (1995) recognize the possibility that captur­ing rents stimu­lates entrepreneurial decisions, including in­vestment in research to cause Schumpeterian innovation.

The ambiguity surrounding the social costs of rent-seeking is stretched almost to breaking point by Baumol (n.d.).  He writes about “entrepreneurial rent-seeking” and considered even the war­lord as an entrepreneur, albeit of the destructive kind since “alertness to opportunities” is one of the warlord’s prime talents.  Baumol correctly argues that the pursuit of profit and wealth is the primary, though not the sole, goal of the en­trepreneur.  Therefore, while some of his kind may re­sort to the more difficult route of technical innovation in either product or pro­duction process, it is rational for the entrepreneur to realize his goal through the alterna­tive and apparently easier path of reducing com­petition through rent-seeking.[5]

As formulated, these concepts have clear resonance in Marxist literature.  It is quite clear, from a cursory reading of Capi­tal, that Marx saw the trans­formation of feudal­ism and the development of capitalism in Western Europe as a move­ment from rent-seeking to profit-making[6].  In fact, while he ac­knowledged that the putting-out merchant or even the land­lord can accumulate rents and transform themselves into risk-taking capi­talists, Marx noted that the really revolu­tionary transformation is that from master crafts­man to capital­ist.

Notwithstanding the aforementioned incertitude regarding the social effects of rent-seeking, however, these concepts were trans­formed by most neoclassical theorists into rigid criteria for evaluating the efficiency of economic institutions.  Invariably, rent-seeking is seen as a social bad.  Some theorists from other traditions have made use of these concepts in novel though related ways.  Ferrer (1988), a ma­jor participant in the “mode of production” debate within Philippine radical circles, opined that the Philippine econ­omy was  semi-feudal semi-colonial (or non-capitalist) precisely because “the prime mechanism for the reproduction of property is a political mecha­nism”.

What is clear is that most obser­vers from different intellectual traditions have a largely negative view of rent-seeking.  This view must be correc­ted if not qualified.  Apart from recognizing the uncertainties regarding the social costs of rent-seeking discussed earlier, one can examine the disposition of the rents “earned.”  There may be resources wasted during the competition for rents.  However, the more important question is to investigate if such rents were used to finance conspicuous con­sumption, political ends, or capital flight; or was put to productive purposes as in­vestment in plant and equipment, research and development, as well as human resource develop­ment.

It is argued that the “earning” of rents per se is not detrimental to economic development.  In some socio-political settings, the availability of rents can accelerate the process of economic development by spurring capital accumulation and technological change.  In others, rents and rent-seeking may result in tremendous wastes (from a social perspective) and discourage productive activity.[7] Favorable conditions and state policy will encourage the transformation of rent-seekers into profit-makers.  In the developing economies, the supply of potential profit-makers will most likely come from the existing pool of rent-seekers.  In fact, Doner (1991) warns against sharp dichotomizing between the two economic actors.  He cites research on South Korean industrialization (Amsden: 1989; Jones and Sakong: 1980; and K. D. Kim: 1976) which indicates that the large industrialists who played a great role in South Korean NIC-hood emerged from the much-maligned rent-seekers and compradors.

The South Korean experience strongly suggests that the efficacious setting is one where the authoritarian developmental state dispenses or assigns rents to favored business groups as long as the latter perform according to international, rather than domestic, market standards.[8] The South Korean state, especially during the 19-year rule of Park Chung Hee, was not only able to discipline labor.  It was likewise able to rein in the industrial capitalists through its control of credit.  The crisis imperative of regime survival disciplined the Park regime and other key social actors into rallying behind a national industrialization project.

The Philippine experience offers a contrasting picture.  During the pre-martial period from 1946-1972, private business groups sought and captured through plunder of the public treasury.  The martial law regime of Ferdinand Marcos (1972-1986) centralized power and attempted to assign rents to selected “winners” even as some rent-seeking continued.  But both pre-martial law and  martial law regimes failed to enforce appropriate economic performance standards on beneficiaries of state largesse.  The ‘soft-budget constraint’ that Kornai (1990; 1986) saw as the particular flaw of Soviet-type economies is thus replicated in the country.  In response to this softness, Filipino businesspersons behaved in the same manner as Soviet state enterprise managers.  They both drew on the state treasury as if it was a bottomless well.  Nonetheless, the Soviet state exacted a modicum of discipline from enterprise managers through a perverse reward-and-punishment system imbricated in the Five-Year-Plans (Mendoza 1993).

In contrast, Filipino rent-earners responded to the soft financial constraint in a rational and predictable manner.  They used state-provided resources to pursue socially detrimental but lucrative and sensible private interests and objectives, including conspicuous consumption, capital flight, and political vote-buying and coercion.[9] At many occasions, they even manage to pass on to the public account the costs of mismanagement and plunder.[10] The relative weakness of the Philippine state vis-a-vis private particularistic interests in both instances is the strongest reason for this failure (Hutchcroft 1998; 1993).

These qualifications are a fresh corrective to the extreme state-bashing propensities of public choice theorists. Indeed, a long line of observers from Gerschenkron (1962) to Supple (1985) have argued that for the late industrializers in Europe, non-market institu­tions such as the state played a key role in the needed “primitive capital accu­mula­tion” preceding industriali­zation.  The mistaken view that the British state was largely passive or limited to a “night watch man” role is common to many theoretical traditions–from Marxist to liberal.

What led previous observers to err in this case was the clearly obvious and direct role that states played in late industrialization.  Weiss and Hobson (1995) challenged this cherished notion and argued that the state played an important role even in pioneering British industrialization, albeit through “non-direct” means. First, in order to finance the military activities befitting the conqueror of the Spanish Armada, the British state borrowed heavily and initiated the ‘financial revolution’ that led to the establishment of the Bank of England and the City of London.  War loans provided both the Bank and the City with much of their business during the 18th century.  Private investors therefore found a ready customer in the British state and built their capitalist fortunes on national debt.[11] In addition, the ‘blue-water’ strategy also enabled the development of the shipping industry, which in turn stimulated a whole train of other industrial sectors–coal, iron, and steel.  Furthermore, Britain’s mastery of the seas helped her foreign trade as well as the City as the navy could now provide a secure environment for her commercial shipping and overseas capital investments. Lastly, government taxation policy led to an active redistribution of money from the poor and non-investing (consumer) groups to the rich and high-saving (investing) groups which in turn stimulated higher investment and economic growth rates.

But a more authoritative source for the argument that the state is necessary for capitalist development everywhere (including England) can be Weber (1968) who developed a full-blown theory of capitalist development (one that explains the emergence of capi­tal­ism) rather than a theory of capitalist dynamics (which was the central concern of Marx).  We­ber’s primary contribution, to high­light the institutional preconditions for capitalist development, is outlined thus:  “[But] industrial capitalism must be able to count on the continuity, trustworthiness and objectivity of the legal order, and on the rational, predict­able functioning of legal and administrative agencies.” (Weber: 1968, 1065)

The basic precondition for capitalist  development is calculability and predictability in the political sphere.  The payment of bribes and rent-seeking per se is not harmful to the capital­ist entrepreneur.  If bribes and rents were predictable or constant, then he will simply integrate them into his cost structure.  What harms him is the unpredictability of rents and bribes.  Weber reminds us that bribery and corruption have “the least serious effect” when they are calcu­lable, and become most onerous when exactions are “highly variable” and “settled from case to case” with every individual rent-seeker.[12]

What needs to be stressed here is that industrial trans­formation requires an initial fund to fi­nance it.  This accumulation process is necessary and generic regardless of the ideological preference of the change agent even as there may be different modalities for capturing rents.[13] If we take these qualifications seriously, then we should be look­ing for progressive rent-seekers in the Phi­lippine economy.  Obviously, we cannot encounter “pure types” in the real world.  What we may likely find are eco­nomic agents who produce or re­produce wealth and/or economic status primarily (NOT SOLELY) through market competition.  These agents may have behaved differently in the past.  The object of future research is to identify these agents, ex­plain the change in their behavior, and determine if the change is irreversi­ble.

Market and non-market rents

It is likewise important to stress that some rents are earned through market trans­actions. To differentiate them from rents gained through non-market mechanisms, we call the former “economic rents” and the latter “non-market rents.”  A holder of any asset in scarce supply can earn eco­nomic rents if he offers the said asset either for sale or for use.  The classic economic rent is the landlord’s rent.  However, land is not the only asset that can command rent.  It is quite clear that a brain surgeon will definitely earn rents. Michael Jackson also ac­cumulates rents as he struts around the world.  Jackson’s rents are quite perma­nent despite the com­bined efforts of all wannabe clones.  As a prelimi­nary typology, I designate Jack­son’s rents as “creativity rents.”

An innovator or inventor also earns “technology rents,” an­other class of “economic rents.”  Such rents are not permanent, however, if the new tech­nology is open or learnable or capable of being “reverse-engineered.”  Virtually, only artists, athletes, and sharp lawyers can earn “creativity rents.”

This point is made to correct errors made by early de­penden­cy theo­rists who be­lieved that all feudal rents are extracted through coercive, non-market means.   Again, a careful reading of Capital (Vol. III) will indicate that the extraction of ground rent through na­ked coercion was true only in early feudalism when the rent form was labor rent.  But in subsequent rent forms–namely, rent in kind, and money rent, or even in the metayer system, coercion had re­ceded to the background and the relationship between land­owner and cultivator took on increasingly an economic (meaning voluntary exchange) character.

Rents of the decidedly non-economic kind can be earned by those with regulatory or licensing powers. As defined by Bu­chanan (1980, 7-8), rents are available when the state restricts “freedom of entry” into a market. For in­stance, the bribe paid by Westing­house to the Marcos regime in the mid-1970s so the former can wrest a supplier’s contract away from Gen­eral Electric is a non-economic rent.  Thus, non-economic rents can always be earned for as long as governments exist.  In the same manner, economic rents can be earned for as long as there is scarcity of assets.  In this sense, one can consider all profits to be economic rents since scarci­ty of resources is the ba­sic economic fact.  Which brings us to the con­clusion that while rents may be minimized as profit making pro­ceeds apace, rents can­not be eliminated en­tirely.  Even a profit-maker will not hesitate to capture avail­able rents provided net benefits are positive.

It is also important to point out that rent-seeking is rather a perva­sive phenomenon.  Even rela­tively marginalized actors can earn rents of both kinds.  In the Philippines, for example, what else would one call the incomes earned by the fixers who proliferate outside govern­ment offices?  Fixers’ incomes may, in a way, be classified as economic rents, inasmuch as the fix­ers perform an actual service (e.g., waiting in line, get­ting a signature, etc.)  In other cases, however, the rent is of a non-market nature.  The clerk who insists on a bribe in exchange for his signa­ture is clearly gaining rent of this na­ture.  This is also true of the police officer who lets one off a traffic viola­tion in exchange of the lagay (petty bribe).

Nevertheless, the existence of market-sourced rents confuses the pic­ture.  One may recall the earlier discussions regarding the ambiguities generated by the concept.  For our purposes, it would be better to limit the term “rent” to non-market rents while market rents are subsumed under the term “profit.”  Furthermore, it is likewise important to dis­tinguish the two concepts fur­ther by insist­ing that a rent-earner simply appropriates values or wealth created by others elsewhere while the profit-earner does so through the creation of new value or wealth.  For these reasons, I prefer the terms “profit-making” and “profit-maker” over the terms “profit-seeking” and “profit-seeker.”

Rent-seeking Environment

What would be the socio-political environment that encoura­ges rent-seeking?  A dictatorship is apparently the most fecund breeding ground for rent seeking.  There are no effective checks in the exercise of political power in this system.  For this  reason, the government can readily dispose of the economic resources un­der its control or could in­tervene in the economy with relative impunity.  As Yoshihara (1988) noted, even a democracy is not entirely unfriendly to rent seekers. In democracies, politicians seek votes by making promises to supporters.   If they were elected to office, these promi­ses must be honored so the politi­cians can count on the same support in the next elections.

What politicians can deliver to their supporters is what they can do with their poli­tical power, e.g., a government import license, foreign exchange allocation, public works project, and the like.  Being politicians, they cannot do these things by themselves; they need the cooperation of the bureaucracy.  Politicians will therefore try to control the bu­reaucracy to suit these ends.  In the process, the bureaucracy’s autonomy is seriously eroded.  Appointments, pro­mo­tions, and tenure in the bureaucracy become politicized and decision making within the bureaucracy becomes highly penetrated by distinct political in­terests.

We have to look beyond the nature of the political sys­tem to identify the fea­tures of a rent seeking society.  A cursory examination of the Philippines as a rent-seeking society suggests the following fea­tures:

a.  Widespread poverty, highly inequitable income distribu­tion, and narrow markets;

b.  Relative abundance in exportable natural resources;

c.  Stagnant production technologies;

d.  A high degree of external dependence; and

e.  A “rule-prone” weak pork-barrel state.

The first factor sets the stage for the development of natural or structural mono­polies that can earn economic rents.  The rela­tive abun­dance of natural exportables indu­ces domestic economic elites to sell to external markets instead of broadening the in­ternal market.  The lucrative income they earn from these export products dissuades them from further processing and value-adding, encoura­ges compra­dor behavior (where one seeks exclusive or monopolistic marketing arrangements), and encourages conspicuous con­sump­tion.  For this reason, when these natural cash products are exhausted, the rent-seeking economy is in deep crisis.  The onset of crisis meanwhile encourages capital flight by rent-seekers (which is not to say that capi­tal flight was absent in the pre-crisis period).

On the other hand, the existence of a foreign patron, who stands ready to bail out the domestic economy for its own strategic reasons, may enable the rent-seeking elites to weather the storm.  This has been the case for the Philip­pines while the US maintained military bases in Clark and Subic.  Hutchcroft (1993: 587) suggested that the withdrawal of US strategic interests from the country in 1991 “will bring increasing pressure to re-orient the economy toward in­terna­tionally competitive modes of operations.”

The obvious impact of stagnant production technologies and technolo­gical de­pendence on external sources is to also stimulate monopolies and deter competition.  For one thing, these technolo­gies are expensive and by themselves erect barriers to free entry.  If the policy environment is biased in favor of capital imports, then capitalists will continue to operate capital-intensive industries in a labor-surplus economy.  If the policy environ­ment is further biased against agriculture and the rural areas (by way of over-valued cur­rencies, credit and incentive biases), then rent-seeking tendencies are fur­ther stimula­ted.[14]

A comment on the state in contemporary rent-seeking socie­ties is in order.  These states, in some cases through their chief executives, have gained control over substantial public resources that could be ap­por­tioned to favored parties.  Hence, these societies are obsessed in trying to make sure that it would be difficult to raid the public purse.  At all governmental levels, elite frac­tions out of power are quite anxious that the in­cumbents’ control of the public largesse will perpe­tuate the latter in power.  In pursuit of this ‘noble’ objective, these states have a rule for almost every­thing.  Ironically, the prolife­ration of rules offers ample opportunities for law­yering and rent-seeking.  For every rule, there is an implementer, a regulator, who could be lobbied for favorable treatment.  Notwithstanding the apparent proliferation of bureaucrats, there is, as Evans (1992: 176-7) reminds us, an under-, not over-, supply of a Weberian bu­reaucracy.  There may be an abundance of regulatory or administrative organizations, “but most have neither the capability of pursuing collective goals in a predictable, coherent way.”  One may argue that the states in rent-seeking societies are necessarily weakly insti­tutionalized states.  Most of the weak states in the contemporary world are those which had not been forged in the crucible of war between nations.

Having outlined the types of rents and the essential features of the rent-seeking environment, we can now profile the typical rent-seeker.  Drawing from his work in Thai­land, Turton (1989: 82-3) offers the following portrait of the typical rent-seekers in rural areas:

At the village level they include–and often in the same per­son, certainly fami­ly–larger landowners, commodity dealers, shopkeepers, village officials, some teachers, rice millers, money lenders, owners of small-scale transport and ma­chine­ry, large-scale emplo­yers of wage labor, etc.  They derive advantage from their external connections and alliances and from their roles in `linking’ the majority of villagers with state and market struc­tures, above all through relations which enable them to accumulate (or be the first stage in the accu­mu­lation of) village surplus through wages, commodity dealing, retail prices, rent and inter­est.  In this they are criti­cally de­pendent both on the external capital­ist sector and on the state-bureaucratic sector.  In rela­tion to the latter they are the beneficia­ries of various forms of state patronage.  Eco­nomically this in­cludes not only access to credit, agricultural inputs, and quotas, as mentioned, but also salaries, fees, sti­pends, per diem allowances for attending meet­ings, proportions of official budgets, politi­cal handouts, strategic economic infor­mation, and preferential access to educa­tion and health services.  In a more political sense they receive offices (which in turn allow for all sorts of nonof­fi­cial remu­nerative opportunities); access to higher-level power holders and the coercive apparatuses of the state, the right to possess weapons; state-backed authority, legitimacy, and prestige; and support for judicial and extrajudicial decisions and actions.

Within the village they are thereby enabled effectively to control and monopo­lize state-initiated committees, associa­tions, development projects, and so on.  Concur­rently they can reinforce their politically and economically dominant positions through various forms of noneconomic patronage (social, religious, etc.) which allows them to benefit from as­sociation with more tradi­tional and village-derived forms of relationship and legitimacy, and in ways which are often no longer reci­procal, or not to the same extent as formerly, and yet can have the ideological effect of mitigating or concealing the extent of differentia­tion and con­tradiction.

Another work on rural Thailand (Turton: 1984, 32) offered the follow­ing compo­site profile of a higher-level rural rent-seeker:

He is a provincial assembly elected representative, owns a transport company, and is in­volved in sales of agricultural in­puts, owns some upland land current­ly being deve­loped, and is engaged in construction work of all kinds (feeder roads, school buildings, police stations, rest houses, public meeting halls, small bridges, small dams, etc.).  He has various district and subdis­trict offi­cials “in his pocket.”  He re­ceives some provin­cial funds for his “territory,” from which he may take a percentage before passing it on and subse­quently also profit­ing from contracts.  He is a member of the local branch of Rotary (or Lions, Jaycees, etc.).  He is also chairman of the lo­cal Village Scouts and a generous pro­vider of funds for weapons for the local volunteer forces.  He, and perhaps his wife, may also donate to local charities and royally sponsored projects (hospitals for ex­ample) for which they may hope to receive state hon­orifics.  He, or more proba­bly his subordi­nates, may likely call on “gun hands” to do their dirty work for them.  So he is involved in both capi­talist ac­tivity and primitive accumulation, with much use of extra-economic co­er­cion.

While Turton’s portraiture is excellent and accurate even for the Philip­pines (simply exchange “Civilian Home De­fense Force”  for “Village Scouts” and “projects of the First Lady” for “royally-sponsored proj­ects”), the typi­cal urban rent-seeker has yet to be profiled.

At the metropolitan apex, McCoy (1994a and 1994b) pro­posed an ex­change model for the Philippines.  Provincial warlords deliver their vote banks to rent dis­pensers in the metro­polis while the latter assi­duously courts the former to ensure their hold on the central state apparatus and treasury. As explained elsewhere by Sidel (1990: 13), “[T]hese local bosses guarantee local stability and deliver votes to state leaders and national-level politicians in ex­change for implicit consent not to contest their local control as well as such resources as access to bank credit, business contracts, pro­tection for vulnerable business enterprises, tax exemp­tions, public works projects and other pork-barrel funds, and support in election years.”

This model will be accurate only if Philip­pine electoral politics remain un­changed.   The suspension of elections in the first six years of martial rule (1972-1978) introduced some difficulties for it.  In addition, developments in the post-Marcos period, especially the 1992 elections, suggest changing electoral trends.  These changed trends indicate that the power of pro­vincial vote gatherers may have diminished signifi­cantly.

Insofar as rent-dispensing has been decentralized by the 1991 Local Gov­ernment Code (LGC), the exchange model must likewise be revised.  In response to this new policy environment, we suggest that rent-seeking hierarchies be delineated.  Un­der the provisions of the Code, a provincial rent-seeker (vis-à-vis the chief rent dispensers in the metropolis) may himself be a source of rent within his jurisdiction.  Among the new po­wers of local execu­tives provided by the 1991 Code include expanded taxation, borrow­ing, and licensing powers–all possible sources or rents to be dispensed to favorites.

In addition, the modalities of the post-Marcos pork-barrel system must also be in­corporated.  As institutionalized in the Coun­trywide Development Fund (CDF) system, members of Congress (both chambers) gain access to sizable funds (a minimum of P 3.0 billion annually[15]) that could be used with a great degree of flexibili­ty.  Invariably,  these funds are spent to ensure the solons’ re-election.

Lastly, the revised model must also incorporate the phe­no­menon of “criminal rents”–benefices granted by the powers-that-be to operate or maintain gambling, prostitu­tion, and other illegal busi­nesses without fear of prosecution.  Antonio Sanchez, the sentenced mayor of Calauan, Laguna appears to be a beneficiary of such a right and has apparently dis­posed of his rents in conspi­cuous consumption, patronage, and payoffs to appropriate patrons.[16]

Sidel (1995: 20) warned against the inadequacies not only of the older patron-client framework of Phil­ippine politics but also of the newer strong society-weak state thesis.  These two distinct frameworks “downplay the role of state structures and institutions in shaping both the ends and the means of political competition, economic accumulation, and social relations” in the country. In addition, Sidel argued that clientelism and Mig­dal­ism[17] likewise underestimate and misunderstand the role of violence and coercion in the country’s socio-political processes.

III. The Rudimentary Model

In this section,  a rudimentary model is sketched by way of several propositions. This rough model of rent-seeking dynamics draws from various in­tellectual traditions in­cluding neoclas­sical economics and Marxist political economy.

Proposition 1.  The rent-seeking agent is, in the main, a ratio­nal agent.  As such, he is goal-oriented and will be indifferent to the means used to achieve the same.

Proposition 2.  However, he is not purely neoclassically-rational.  The rent-seeking agent is not simply or purely a profit-maximizer.  He may be that given certain conditions; under real-world conditions, however, he is less-than neoclassically-rational.  This means that he may be simply satisficing or he could also be motivated by non-economic considerations such as prestige, etc.

Proposition 3.  The rent-seeking agent operates in the imper­fect real world where transaction costs are not zero, where non-economic actors such as the state and other in­sti­tutions operate, and where uncertainty is a certainty (since information itself is a com­modity and information-gathering incurs real costs).  For that matter, rent-seeking may not be seen purely as a preferred behavior but a ‘rational’ mode of existence indica­ted by the constraints faced by the rent-seeker.

Notwithstanding the anticipated objections of some Marxists, I will ar­gue that the last statement made above has solid Marxist credentials.  Nobody is a free agent; eve­ry­body has to operate within material as well as cultural constraints.  A capitalist has to exploit his workers, not because he has a per­verse desire to do so, but because, as Marx has pointed out, he has to do so in order to reproduce himself as capitalist!

Proposition 4.   The policy environment (a.k.a. the Marxist superstructure) in the Philip­pines is one that stimulates and abets rent-seeking.  Conversely, Filipino rent-seekers seek to maintain such a policy environment.  Unless there are countervailing forces (whether endogenous or exogenous) strong enough to offset this dynamic, rent-seeking in the Philippines could be main­tained inde­finitely.  This seems to be suggested by Rivera (1992) who pins much hope for transformation on a “modernizing social coalition.” On the other hand, I am more sanguine regarding  sources of change elsewhere even as I do not discount the development of a moderniz­ing social coalition at the ap­propriate time.  It may indeed be the case that a “modernizing social coalition” assumes state power and creates a policy environment that is hospitable to enterprise.

Proposition 5.  For that matter, I believe the behavior of the rent-seeking agent is not shaped by the policy environ­ment alone.  There are factors in the economic ‘base’ that can influence and even induce changes in his beha­vior.  Among these factors include urba­nization, population growth, exhaustion of natural resources, greater integration into the global market,  and technological change.  ‘Cultural shifts’ (a.k.a. new thinking) or  cultural factors, as a whole, may also play an important role.[18] The apparent theo­retical progenitor of cultural theories of enterprise is Max Weber’s Protestant Ethic.  While ear­lier theorists held the United States and Protestant Europe as models for entrepreneurial  societies, recent works focused on the East Asian NICs and their Confucianist cul­ture.  While individualism was earlier extolled as the sine qua non of entrepreneurial culture, recent theorists consider it an impediment and extol group spirit instead.

At this point, it is sufficient to note that these fac­tors may either im­pinge on the policy environment to either induce changes which will penalize (economically and other­wise) rent-seeking be­havior or create a material envi­ronment which frustrates or discourages rent-seeking (since the rent-seeker’s goals are either not met or are not met satis­factorily).

For instance, a combination of factors may diversify sources of rural incomes, raise rural consciousness, and en­large electoral bases.  In response to this situation, the rent-seeker (esp.  one who reproduces himself through the control of public office) may seek to earn non-rent incomes as insurance in cases of electoral defeat.  The case studies of Sidel (1994) on Montaño, Moja­res (1994) on the Osmeñas, and McCoy (1994b) on the Lopezes all strongly suggest the following sub-propositions:

A.  A sub-national rent-seeker who has not diversified into profit-making runs the risk of non-reproduction.  In fact, such a rent-seeker must not antagonize the chief rent-dispenser in Malaca­nang if he wants to retain his lo­cal monopoly.  This was true in case of  then Cavite strong man Justiniano Montaño who annoyed Presi­dent Marcos; there seems to be a repeat in Remulla’s case.[19]

B.  The transformation of a rent-seeker to a respect­able profit-maker is not com­plete.  For as long as monopoly rents are available, even a profit maker will try to capture it (as illustrated in the case of the Lopezes during the Aquino presidency).  This is true since the primary goal is acquisition of profit and wealth, as Baumol had pointed out.

C.  Rent-seeking may involve access to instru­ments of vio­lence.  Competi­tion for rents is inherently violent (since it is a zero-sum game) and competing rent-seekers may try to ensure their success even up to the extent of employing criminal means.  For this matter, political cor­ruption and intimida­tion belong to same family of means employed by the rent-seeker.

D.  The agent matters.  There is obviously a difference be­tween a Montaño and a Lopez.  Apart from noting the dif­ference in the material envi­ronment of both personalities, it is surmised that a difference in the risk taking behavior of both actors also helps ex­plain Lopez’ relative success and longevity.

Proposition 6.  Fractionalization of elites along various lines and elite transforma­tion and reconstitution can also lead to changes in the policy envi­ronment that could likewise induce changes in rent-seeking behavior.  The initial reformist noises made by the Ramos administration (an administration which does not owe its victory to local bosses and warlords) and its relative retreat from re­form following the formation of the de Venecia “rainbow coali­tion” will serve as an interesting case study by itself.  However, to make it manageable, one should study a particu­lar sector such as tele­communications, banking, or inter-island shipping.

Proposition 7.  External (meaning foreign) agents can like­wise offer (or withhold) resources that may either stimulate or discourage rent-seeking.  For quite a time, re­sources from interna­tional agencies have enabled local elites to stimulate growth without reforming the basic poli­tical economy.  This is es­pecially true dur­ing the Marcos years but was also evident during the Aquino years.  The compradors in Cory’s cabinet will mouth free market rhetoric to ensure the approval of IMF loans.  Once these critically-needed loans were approved, they will turn to their retainers in Congress to maintain protection­ist tariff bar­riers.

In the current period, an examination of the critical impact of foreign agents (including non-traditional inves­tors–Koreans, Tai­wanese, etc.) in the economic develop­ment of the so-called growth corridors or alternative me­tropo­lises such as General Santos, Davao City, Baguio-La Union, and Olongapo may prove to be instructive.

These studies must likewise be conducted with due con­side­ration of the phenome­non of supra-national economic zones.  For instance, one may ask how impulses generated by South China-Taiwan-Hongkong growth poly­gon affect economic activity in such places as Olongapo or Baguio.  Another question: why are the Americans inordinately interested in General Santos?

Proposition 8.  Movement from the family as the primary wealth-producing insti­tution will be done only when it is no longer able to meet the imperatives of a changed policy or ma­terial envi­ronment.  For instance, in more competi­tive settings (especially where new policies allowed the entry of big­ger foreign actors) or in capital-intensive ven­tures, the limited ca­pability of families to mo­bilize resources may force “entrepreneurs” to use non-family institutions such as the business firm (even if we acknowledge the existence of family-controlled firms).  Towards this end, a case of a family-firm that had to go public may likewise be fruitful.

Social network analysis

Though traceable to Weber, a possible line of attack is promised by “social net­work analysis”, the newest intersection between economics and sociology, as well as “social exchange the­ory,” one of the former’s theoreti­cal foundations.  According to con­temporary observers, social network analysts reformulate eco­nomic theories by supplanting atomistic notions of information and action with tangible network structures of social relations.  Infor­mation, seen by economists as products, is considered by socio­logists as often unintended products of social relations.  Therefore, it is not possible “to decouple the information from its social struc­tural base” nor would be safe to conclude that information will be available to actors “regardless of their level of investment or search, absent the social connections that provide access to the information in the first place.”[20]

Social exchange theory is simply the economic analysis of noneconomic social situations. However, social exchange theorists argue that, instead of using individuals as key units in analyzing so­cial and exchan­ges, the appropriate units of analyses are social relations, involving “a continuing series of  opportunities, initia­tions, and transactions” among ac­tors.[21] They have likewise broadened the set of social relations to be studied beyond commodi­ty exchanges and argued that just as market forces (of supply and demand) set commodity prices, scarcity and dependence influence power, status, and other alloca­tions in social exchanges.

This theory seems to better explain apparently non-rational or ir­rational (from a neoclassical standpoint) transactions by focusing on the “social and historical em­beddedness” of economic activity, i.e., by document­ing how social forces influence the orien­tations and options available to rational transactors[22] as well as highlighting their dif­ferent underlying social logics.  Admittedly, what may seem to neoclassical economists as the irra­tional use of resources by rent-seekers is perfectly logical within the context of  the rent-seekers’ social logic.  A neoclassical analyst may fail to appre­ciate the extra-ordinary lengths a rent-seeker may go to in or­der to cement social ties with his patrons and clients by way of compadrazgo, utang ng loob (debt of gratitude), and other social devices.  For a social exchange analyst, however, these efforts make  good sense.

In his provocative piece, Baumol raised the rhetorical point that if productive en­trepreneurship was determined exclusively by history, tradition or social psychological circumstances, then the policy maker is most likely to be powerless to do much about it.  However, if a society’s  structure of incentives and pay-offs plays an important if not cru­cial role, then there is room for policy.  What he is referring to is the ‘rules of the game’ that determine earnings of different economic actors.  At different times and different places, the relative payoffs to profit makers and rent seekers differ significantly.  While these rules may change sometimes by happen­stance (or by factors considered exogenous or accidental), in other cases they are changed by policy.

A society’s payoff structure–the opportunities for either rent-seeking or profit making–depends largely on the policy environment created by the state.  Then the next order of business is to inquire into the factors that could lead to policy changes.  In truth, a dynamic model which draws inspiration from Max Weber and more contemporary theo­rists on the Third World state (Evans: 1992 and Brett: 1988) and the re­cent experience of Thai­land and Indo­nesia is proposed by Hutchcroft (1993: 92-93).  The elements of this model are:

(1)  there is substantial economic growth, fueled to a large extent by foreign capital and aid, or (in special cases, booming strategic exports such as oil);

(2)  a more assertive business class emerges; and

(3)  this business class, with the assistance of for­eign capital (and in­ternational aid institutions) demands the  regularization of re­lations between the government and  business interests–which leads to

(4)  the erosion of the hegemony of the existing elites; and

(5)  the gradual and fitful creation of a political en­vironment that pro­vides a more congenial foundation to the development of advanced forms of  capitalist accumulation.

In agreement with the Rivera thesis mentioned earlier, Hutchcroft is pessimistic that this will happen in the Phil­ippine case where private oligar­chic interests plunder the public treasury.  The difference between the Philip­pines, on one hand, and Thailand and Indonesia, on the other, is that bureaucratic military elites are in power in the latter countries.  These elites, which are based firmly in public apparatuses, have been able to accumulate rents at ex­pense of private vested interests as well as build stronger states.  For this reason, Hutchcroft (1993: 110) believes that in the Philip­pines, “the emergence of modern ra­tional capi­talism will likely depend on the prolonged, turbulent process of breaking down the oligarchy’s domination of the state apparatus, and building up a state that is able to provide some greater measure of calcu­lable ad­judication and administration.”

The starting point of the dynamic model sketched above, economic growth, has not led to creation of new social forces that could provide, as in the case of Thailand or possibly in Indonesia, a clear basis for social conflict that could lead to major political changes.  Hutchcroft be­lieves that given the diversification of inter­ests of the Philippine rent-seeking oligarchy enables it to capture fully the benefits of economic growth and pre­vent any split within its ranks that could lead to policy changes.  For this reason, he pines for (like Rivera) a political solu­tion, a new, strong Philippine state.  But he fails to tell us how this state could be built.  He obviously has given up on the revolution­ary forces in the country. He also quali­fied his earlier analysis of the possible effect of US with­drawal.

This last point is one which I wish to subject to critical in­vestigation.  Is it true that the rent-seeking elites are the sole beneficiaries of economic growth?  Is it likewise true that these elites are the only poles of accumu­lation in the country?  Or are there other significant avenues for wealth accumulation which in turn will create new elites that will provoke changes in policy to create the Weberian state and bureaucracy in the Philip­pines?  What will be the cumulative impact of the country’s greater inte­gration into the global economy (following the new Uruguay Round treaty) and the world’s financial markets; the rela­tive exhaustion of the country’s natural resource base (and the accruing environ­mental crisis); the further development of know­l­edge- and technology-based wealth-creating activities; and the reconstitution of Phil­ippine society through population growth, in­creased urbanization, and labor mobility?

I do believe that rule of law by a strong state (aided by an able bu­reaucracy) will stimulate sustainable economic development and change in the Philippines.  However, I will argue that changes in the economy, in the ways by which wealth is produced and ap­propriated, will be a stronger ba­sis for the political struggles that will lead to the creation of that same state.

I hypothesize that the critical elements I identified above (greater inte­gration with global economies, new tech­nologies, natu­ral resource depletion, and changed demograph­ics) will inexorably erode rent-seeking opportunities and force sec­tions of the current rent-seeking oligarchy to turn to profit making.  In contrast to Rivera and Hutchcroft, I place more premium and hope on the effects of factors that will impinge upon the state rather than on the state itself. The recourse to neoliberal solutions is necessarily resorted to given the current weakness and incompetence of the Philippine state apparatus.  The North East Asian formula–where a state disciplines business groups in pursuit of national development goals—may not replicable here.  Hopes are better pinned on the international market and its competitive pressures to discipline both public and private actors in the Philippine economy.  While this solution may have theoretical support from such venerables as Smith, Montesquieu and Hume[23], there are obvious limits to what can be done without a substantial increase in state capacity.

What is hypothesized is that continued differentiation within the entrepreneurial elite will result from the economy’s increasing integration into the global economy.  It could lead to the profit-makers gaining the upper hand vis-a-vis rent-seekers; the development of a “growth coalition” composed of entrepreneurial profit-makers, state-based technocrats, and middle classes; and the building of a more appropriate institutional and policy environment more conducive to profit making.  In short: a relatively weak state adopts neoliberal policy which strengthens the profit-making sections of the entrepreneurial elite and stimulates economic growth that is shared with the country’s middle class.  The beneficiaries of growth in turn create a stronger state that is hostile to rent-seeking and therefore promotive of profit-making.  Obviously, the creation of the Weberian state is not inevitable; it will still depend upon the strengths and the creative skills of the contending parties.  However, the erosion of rent-seeking opportunities will go a long way in tilting the balance of forces in favor of change.

The researcher’s task therefore is to establish if such ero­sion is in­deed taking place.

BIBLIOGRAPHY

Amsden, Alice H. (1989). Asia’s Next Giant: South Korea and Late Industrialization. New York: Oxford University Press.

Baron, James N. and Michael T. Hannan (1994). “The Impact of Economics on Contemporary Sociology.” Journal of Economic Literature 32 (3): 1125-1148.

Baumol, William J. (n.d.). “Development and Entrepreneurship, Productivity or Rent-Seeking.” In Choice, Growth and Development: Essays in Honor of Jose Encarnacion. Que­zon City: UP School of Economics. (Forthcoming.)

Billig, Michael S. (1994). “The Death and Rebirth of Entrepreneurism on Negros Island, Philip­pines: A Critique of Cultural Theories of Enterprise.” Journal of Economic Issues 28 (3): 659-678.

Brett, E. A. (1988). “States, Markets and Private Power: Problems and Possibilities.” In Privatisa­tion in Less Developed Countries, pp. 47-67. Edited by Paul Cook and Colin Kirkpatrick. Sussex: Wheatsheaf Books and New York: St. Martin’s Press.

Buchanan, James (1989). Explorations into Constitutional Economics. College Station: Texas A& M University Press.

Buchanan, James, Robert Tollison, and Gordon Tullock, eds. (1980). Towards a Theory of the Rent-Seeking Society. College Station: Texas A & M University Press.

Campos, Jose Edgardo (1992). “The ‘Political Economy of the Rent-Seeking Society’ Revisited: Cronyism, Political Instability and Development.” (Typewritten.)

Cook, Karen S., ed. (1987). Social Exchange Theory. Newbury Park, CA: Sage Publications.

Corpuz, Onofre D. (1989). The Roots of the Filipino Nation, Volume I. Quezon City: AKLAHI Foundation, Inc.

De Dios, Emmanuel (1990). “A Political Economy of Philippine Policy Making.” In Economic Policy-Making in the Asia-Pacific Region, pp. 109-147. Edited by John Langford and K. Lorne Brownsey. Halifax, Nova Scotia: Institute for Research on Public Policy.

Doner, Richard F. (1991). “Approaches to the Politics of Economic Growth in Southeast Asia.” Journal of Asian Studies 50 (4): 818-849.

Drucker, Peter F. (1993). Post-capitalist Society. HarperCollins Publishers.

Ekelund, Robert Jr. and Robert Tollison (1981). Mercantilism as a Rent-Seeking Society: Regu­lation in Historical Perspective. College Station: Texas A & M University Press.

Evans, Peter. (1992). “The State as Problem and Solution: Predation, Embedded Autonomy, and Structural Change.” in The Politics of Economic Adjustment: International Con­straints, Distributive Conflicts, and the State, pp. 139-181. Edited by Stephan Haggard and Robert Kaufman. Princeton University Press.

Fegan, Brian (1982). “The Social History of a Central Luzon Barrio.” In Philippine Social History: Global Trade and Local Transformations, pp. 91-129.  Edited by A. McCoy and E. de Jesus. Quezon City: Ateneo de Manila University Press.

Ferrer, Ricardo F. (1988). “Political Economy of the Aquino Regime: From Liberalism to Bu­reaucratic Authoritarianism.” Economic and Political Weekly, 30 July 1988.

Granovetter, Mark. “Economic Action and Social Structure: The Problem of Embedded­ness.” American Journal of Sociology 91 (3): 481-510.

Hutchcroft, Paul.1998. Booty Capitalism: The Politics of Banking in the Philippines. Quezon City: Ateneo de Manila University Press.

Hutchcroft, Paul (1993). “Predatory Oligarchy, Patrimonial State: The Politics of Private Com­mercial Banking in the Philippines.” Ph.D. dissertation, Yale University.

Jones, Leroy P. and Il Sakong (1980). Government, Business, and Entrepreneurship in Economic Development: The Korean Case. Cambridge: Harvard University Press.

Jomo, K. S. and Edmund Terence Gomez (1995). “Rents, Rent Seeking and Rent Deployment in Malaysia.” University of Malaya. (Typewritten.)

Kim, Kyong-Dong (1976). “Political Factors in the Formation of the Entrepreneurial Elite in South Korea.” Asian Survey 16 (5): 465-477.

Kornai, Janos (1990). “The Affinity Between Ownership Forms and Coordination Mechanisms: The Common Experience of Reform in Socialist Countries.” Journal of Economic Perspectives 4 (3): 131-147.

Kornai, Janos (1986). “The Hungarian Reform Process: Visions, Hopes and Reality.” Journal of Economic Literature 24 (December): 1687-1737.

Krueger, Anne O. (1993). Political Economy of Policy Reform in Developing Countries. Cam­bridge and London: The MIT Press.

Ledesma, Jose Ernesto (1994). “Cronies, Oligarchs and Rent-Seeking: A Theoretical Model of State Autonomy and Investment Behavior in the Philippines and other Asian Countries.” University of Massachusetts at Amherst. (Typewritten.)

Lee, Chung H. (1992). “The Government, Financial System, and Large Private Enterprises in the Economic Development of South Korea.” World Development 20 (2): 187-197.

Manasan, Rosario G. (1994). “Investment Incentives, The Investment Priorities Plan and the Board of Investments: Revisited.” In Political-Economic Restructuring and Na­tional Development, pp. 1-32.

McCoy, Alfred W., ed. (1994). An Anarchy of Families: State and Family in the Philippines. Que­zon City: Ateneo de Manila University Press.

McCoy, Alfred W. (1994a). “‘An Anarchy of Families’: The Historiography of State and Family in the Philippines.” In An Anarchy of Families: State and Family in the Philippines, pp. 1-32. Edited by A. W. McCoy. Quezon City: Ateneo de Manila University Press.

McCoy, Alfred W. (1994b). “Rent-Seeking Families and the Philippine State: A History of the Lopez Family.” In An Anarchy of Families: State and Family in the Philippines, pp. 4299-536. Edited by A. W. McCoy. Quezon City: Ateneo de Manila University Press.

McCoy, Alfred W. and Ed. C. de Jesus, eds. (1982). Philippine Social History: Global Trade and Local Transformations.  Quezon City: Ateneo de Manila University Press.

McCoy, Alfred (1982a). “Introduction: The Social History of an Archipelago.”  In Philippine Social History: Global Trade and Local Transformations, pp. 1-18.  Edited by A. McCoy and E. de Jesus. Quezon City: Ateneo de Manila University Press.

McCoy, Alfred (1982b). “A Queen Dies Slowly: The Rise and Decline of Iloilo City.” In Philippine Social History: Global Trade and Local Transformations, pp. 297-358.  Edited by A. McCoy and E. de Jesus. Quezon City: Ateneo de Manila University Press.

Migdal. Joel S. (1988). Strong Societies and Weak States: State-Society Relations and State Ca­pabilities in the Third World. Princeton University Press.

Mojares, Resil B. (1994).  “The Dream Goes on and on: Three Generations of the Osmeñas.” In An Anarchy of Families: State and Family in the Philippines, pp. 311-346. Edited by A. W. McCoy. Quezon City: Ateneo de Manila University Press.

Montes, Manuel F. (1988). “The Business Sector and Development Policy.” In National Deve­lopment Policies and the Business Sector in the Philippines, pp. 23-77. Edited by Aiichiro Ishii, et al. Tokyo: Institute of Developing Economies.

Montinola, Gabriella R. (1994). “The Foundations of Political Corruption: Insights from the Phil­ippine Case.” Asian Journal of Political Science 2 (1): 86-113.

Preobrazhensky, Eugen A. (1980). The Crisis of Soviet Industrialization: Selected Essays. London: Macmillan.

Rivera, Temario C. (1992). “A Strong State for Industrial Transformation and Democratic Effec­tive Governance: The Challenge of the Post-Aquino Philippines.” In A Strong State, A Mixed Economy in a Democratic Society: An Alternative Policy Agenda for the 1990s. Philippine Center for Policy Studies. (Typewritten.)

Roth, Dennis (1982). “Church Lands in the Agrarian History of the Tagalog Region.” In Philippine Social History: Global Trade and Local Transformations, pp. 131-153.

Sidel, John (1995). “Coercion, Capital, and the Post Colonial State: Bossism in the Post-War Philippines.” Ph.D. dissertation, Cornell University.

Sidel, John (1994).  “Walking in the Shadow of the Big Man: Justiniano Montano and Failed Dy­nasty Building in Cavite.” In An Anarchy of Families: State and Family in the Philippines, pp. 109-162. Edited by A. W. McCoy. Quezon City: Ateneo de Ma­nila University Press.

Sidel, John (1990).  “Big Men with Bolos, Bosses, Bullets, Bank Loans, and Bus Companies: Lo­cal Power in Philippine Politics.” Cornell University. (Typewritten.)

Simbulan, Dante (1965). “A Study of the Socio-Economic Elite in Philippine Politics and Go­vernment.” Ph.D. dissertation, Australian National University.

Supple, Barry (1985). “States and Industrialization: Britain and Germany in the Nineteenth Cen­tury.” In States and Societies. Edited by David Held, et al. Oxford: Basil Blackwell.

Tiglao, Rigoberto (1983). “The Political Economy of the Philippine Coconut Industry.” in Politi­cal Economy of Philippine Commodities. Edited by Randolf David and Temario Rivera. Quezon City: Third World Studies Center.

Tullock, Gordon (1980). “Efficient Rent-Seeking.” In Toward a Theory of the Rent-Seeking Society, pp. 97-112. Edited by J. Buchanan, R. Tollision, and G. Tullock. Texas A & M University Press.

Turton, Andrew (1989). “Local Powers and Rural Differentiation.” In Agrarian Transformations: Local Processes in Southeast Asia, pp. 70-97.  Edited by Gillian Hart, Andrew Turton, and Benjamin White. Berkeley: University of California Press.

Turton, Andrew (1984). “Limits of Ideological Domination and the Formation of Social Con­sciousness.” In History and Peasant Consciousness in Southeast Asia, pp. 19-73. Edited by A. Turton and S. Tanabe. Osaka: National Museum of Ethnology.

Wade, Robert (1992). “East Asia’s Economic Success: Conflicting Perspectives, Partial Insights, Shaky Evidence.” World Politics 44(2): 270-320.

Weber, Max (1968). Economy and Society. Edited by Guenter Roth and Claus Wittich. New York: Bedminster Press.

Yoshihara, Kunio (1988). The Rise of Ersatz Capitalism in South-east Asia. Singapore: Oxford University Press.


Appendix

Toward a More Complete Theory of Rents and Rent-Seeking

A.         Rents, as a construct in political economy, are usually associated with monopolies and imperfect competition and markets.  In the literature, rents always never represented value created in production but represented a portion of the created value captured during the distribution process.  In short, rents are not created values but captured values.  In this sense, rents represent pure transfer of resources from one economic actor to another; the transfers are mediated either through the market, the state, or non-market, non-state mechanisms or institutions.  The economic actors may either be private agents or institutions or public entities.

But all general statements will have to be qualified.   Consider Tullock’s (1988: 51) example:  the person who invents and patents a cure to cancer (or AIDS) will be considered a public benefactor even if he became extremely wealthy by claiming monopoly rents on the patent.

B.         In the main, there are three types of rent differentiated according to mode of “creation” and disposition: market rents, public choice rents, and non-market, non-state rents.  Market rents (or Rent I) are rents created by natural or structural market imperfections or market power.  When we say natural market imperfections, we mean market imperfections that are not caused by state action such as licenses or tariffs.  If a public utility monopoly endures because huge capital requirements deter the entry of others, then we have a natural or structural market imperfection.  The structural monopoly earns monopoly rents.  The best example of a market rent is the classic landlord rent.

Some type I rents attract “good” rent-seeking, the latter concept defined as the expenditure of resources towards the capture of rent.  An example is the cancer cure patent mentioned earlier.  To the extent that the rent is successfully captured, i.e., the invented cure was successful and could be patented, the resources expended to capture the rents from the patent could not be considered to be deployed wastefully.   In contrast, the use of resources to capture ownership of a choice piece of real estate is not only wasteful but also criminal.

Public choice rents (or Rent II) are the rents created by the state when it restricts entry to the market.   This rent type attracts wasteful rent-seeking; the “right” to capture the rent may be sold to the highest bidder. However, it could be also be dispensed or deployed by the state to favored parties.  If the state restricts market entry or competition, the actor who captures public choice rents also earns monopoly rents.  The distinction between rent-seeking and rent-dispensing is an important one and will surface in the subsequent discussion on rents and development.

The third type (or Rent III) is rents created by non-economic, non-state bodies (including churches, mass media, and political parties) but is sought and could be captured by anybody–businessmen, state officials, politicians, or private citizens.  While these bodies are not strictly state or market (for profit) agencies, they can create rents because they also enjoy monopoly power of sorts.  Religions monopolize the supply of spiritual goods while mass media may monopolize information.  In this sense, the rents that they can earn are quite similar to market or monopoly rents.  This rent type may also attract rent-seeking, albeit of a kind quite different from public choice rent-seeking.  Let us illustrate this last point with the Iglesia Ni Kristo (INK) in the Philippines.  The INK is obviously a newer and smaller religious organization than the Catholic Church.  But it is considered to have a stronger political clout than the latter; INK members supposedly vote as a single bloc according to the dictates of their Church leaders.   For this reason, INK leaders are wooed every which way by politicians and their brokers for electoral support.  In return, the INK supposedly gets material and non-material rewards from their clients.  Other examples are supplied by Hutchcroft (1996): the AC-DC (attack and collect-defend and collect) politician and journalist.

The fourth type of rent (Rent IV) is “criminal rents” earned from benefices granted by the powers-that-be to operate or maintain gambling, prostitution, gun-running, illegal drugs, and other illegal businesses without fear of persecution or harassment in exchange for a cut of the proceeds.  Antonio Sanchez, the recently-sentenced mayor of Calauan, Laguna (for rape and murder) appears to be a beneficiary of such a right and has apparently disposed of his rents in conspicuous consumption, patronage, pay-offs to appropriate patrons.[24] This rent type is usually associated with means of coercion and violence.

One can still identify a fifth type of rents (Rent V) if the state itself is construed as a rent-seeking agent vis-a-vis other states and other international actors, which are rent-assignors.  Official development assistance and military credits are examples of this rent type and are actively sought after by many states in the developing world, including the Philippines.  This type of rent is often associated with the development of clientelistic relations between the donor-state and the recipient-state.

C.      Depending upon the active agent, it is also important to distinguish between private rent-seeking and public rent-seeking.  Murphy, Shleifer and Vishny (1993: 412) define private rent seeking as taking the form of “theft, piracy, litigation, and other forms of transfer between private parties” while public rent-seeking is “either redistribution from the private sector to the state, such as taxation, or alternatively from the private sector to the government bureaucrats” taking the form of lobbying, corruption, and the like.  While we may or may not fully subscribe to the notion that taxation is rent-seeking, public rent-seeking provides the bridge between rent-seeking and the much older concept of corruption.

How do we relate rent-seeking and corruption?  In a situation where the state (or a state agency) creates rents, the normal economic reaction of private actors is to use all means–legal, extra-legal, and illegal–to capture them.  Lobbying government officials is a legal way while bribery is an illegal way of capturing rents.  The bribe can be seen as the purchase price of a good or a service that the state officially owns but is now appropriated privately and personally by government officials.  In so far as officials have discretion over the provision of these goods, they can collect bribes from private agents (Shleifer and Vishny 1993: 599).

D.        A key flaw of much of the rent-seeking literature (of the public choice school) must be fully elucidated.  Rents and rent-seeking, especially in their pejorative sense, are concepts that had been defined with reference to a fairy tale–that of perfect competition.   To the extent that competition and markets are imperfect, then rents will always be available for capture.

It is true that the public choice literature had fired its strongest guns against state-created rents (or Rent II).  But as we have pointed out, not all rents are created by the state nor do all rents attract wasteful rent-seeking.  A whole category of rents will exist and continue to exist because certain economic assets will remain scarce relative to demand.  Type II rents will disappear only if the state disappears.  And lastly, one can raise the valid question whether all rent-seeking efforts are necessarily wasteful?

E.         Among other reasons, the competition amongst rent-seekers is considered by public choice literature to be wasteful.  The resources expended by rent-seekers are resources that could have been used for more productive purposes.   In an ironic twist to neoclassical logic, it is suggested that restricting the competition for rents may reduce wasteful rent-seeking.  If one follows this line of reasoning, the least wasteful situation is one where an absolute dictator, who will brook no complaint, will dispense rents as he sees fit.

It could be shown however that competitive rent-seeking can flourish in the most authoritarian political setting simply because the dictator cannot make all decisions.  Below the apex of power,  there will be many decision-makers at all possible levels who could compete with each other for the rents or for the power to dispense the rents according to the their competencies.  The existence of these officials will similarly attract wasteful rent-seeking.  It is true of course that the competition for rents is not fully open even in democracies. The costs or wastes associated with rent-seeking are thus limited, as Jomo and Gomez (1995) explain.

An opposite scenario, which is consistent with neoclassical economics, may develop with respect to public rent-seeking, or at least, in the case of bribes.  If producer A can buy a government good more cheaply than producer B, then he can outcompete the former in the product market.  The cheapest way to purchase a government good is to bribe a government official at a rate lower than the official level–a transaction labeled as corruption with theft by Shleifer and Vishny (1993).[25] So if producer A bribes an official to reduce his costs, his competitors must do so also.  Competition between buyers of government goods will spread cost-reducing corruption, i.e., corruption with theft, across the economy.  But the greater demand for cheaper government goods (meaning a greater supply of bribes) will boost bribe rates to just a shade lower than the official prices.  Downward pressure on the bribes could come from the competition among bribable government officials.  However, it would be easier for them to collude to keep bribe rates up than for consumers to unite for lower rates.

F.  Finally, it is likewise useful to distinguish between rent-seeking, the expenditure of resources to capture rents created by the state; and rent-assigning, the granting by the state, or by any of its officials or agencies, of rents or of opportunities to capture rents to selected private or public actors.  These processes need not be mutually exclusive in the sense that some private actors may still seek rents even as the state assigns them.  Nonetheless, one can say that the more rents are assigned and are known to be assigned by the state or its leaders and officials, the less the rent-seeking will be.

References to Appendix

Hutchcroft, Paul (1996). “Corruption’s Obstructions: Assessing the Impact of Rents, Corruption, and Clientelism on Capitalist Development in the Philippines.” Paper read at the annual meeting of the Association for Asian Studies, Honolulu, Hawaii.

Jomo, K. S. and Edmund Terence Gomez (1995). “Rents, Rent-Seeking and Rent Deployment in Malaysia.” (Typewritten.)

Murphy, Kevin, Andrei Shleifer and Robert Vishny (1993). “Why is Rent-Seeking So Costly to Growth?” American Economic Review Papers and Proceedings 83(2): 409-414.

Shleifer, Andrei and Robert Vishny (1993). “Corruption.” Quarterly Journal of Economics 108(3): 599-617.

Tullock, Gordon (1988). “Rents and Rent-Seeking.” In The Political Economy of Rent-Seeking, pp. 51-62.  Edited by Charles Rowley, Robert Tollison, and Gordon Tullock. Boston: Kluwer Academic Publishers.


[1]   Montes (1988) defined these concepts as they apply to the Philippine setting.

[2]  For a fuller discussion, see Krueger (1993), esp. pp. 107-119.

[3]    This is obviously another fairy tale; even the absolute dictator will have to delegate some decision-making powers to his subalterns since it is physically impossible and administratively foolish for him to make all the necessary decisions.  To the extent that decision-making is decentralized, competitive rent-seeking can still occur in dictatorial settings.

[4]   For a sampling of this literature, see Tullock (1980).

[5]   W. J. Baumol, “Development and Entrepreneurship, Productivity or Rent-Seeking,” in Choice, Growth and Development (forthcoming).

[6]  I prefer the term “profit-making” because it better communicates  the notions of market competition and process  better than “profit-seeking”.  The basic idea here is that when one “earns” rents, he is merely appropriating wealth created elsewhere.  In the case of  profit, however, one who earns pro­fits does so by creating new wealth.  But others may simply see this as an idiosyncrasy.  However, the distinction between “new value” and “old value” was the concern of political economists. This was specially true of the Physiocrats (with their produit net) of late 18th century France.  Unfortunate­ly, the Physiocrats misused the concepts to conclude that agriculture was the only productive economic activity since agricultural output is clearly (or physi­cally) greater than input.

Adam Smith and the other classical economists (including Marx) res­ponded to the Physiocrats by maintaining the distinction between “productive labor” and “unproductive labor.”  Through these concepts, all services were considered “unproductive labor” since they did not produce tangible outputs.  The limitations of these time- and place-bound concepts are most apparent in the contemporary post-industrial economies where the services, particularly knowledge-based, have emerged as the most dynamic sector.

For a fuller discussion of the changes in late 20th century economies, see Drucker (1993).  He argues that the basic economic resource is no longer capital, nor natural resources nor labor but is and will be knowledge.

[7]   The point that rent-seeking is wasteful only from a social viewpoint is an important one.  In contrast, it is not considered totally wasteful from an individual perspective.  While an unsuccessful rent-seeker may rue the “loss” of resources, these same resources were not destroyed in the process but got transferred as incomes of other individuals.  On the other hand, the successful rent-seeker will consider his costs as a wise investment.

[8]   Lee (1992: 193) stresses the importance of having externally determined world prices as the disciplining parameter.  A government therefore cannot arbitrarily change prices to cover “the consequences of an inefficient allocation of credit”.  World prices therefore serve as an impartial jury to determine whether the state indeed picked winners or simply threw away good money at non-competitive or inefficient firms.

[9]   Filipino politicians normally resort to vote-buying and/or intimidation of voters to ensure their election.  According to De Dios (1990), vote-buying and political violence may be viewed as one form of investment.  The elected official uses the public office to exact returns on this investment.

[10]   In reaction to the massive state bailouts of crony firms which went under due to the 1981 Dewey Dee financial crisis, Jaime Ongpin quipped that the acronym CDCP actually meant “Capitalism Daw, Cronyism Pala”.  The Construction and Development Corporation of the Philippines (CDCP) is one of the largest crony conglomerates established during the martial law period and was rescued from financial ruin by Marcos with public funds.  The infusion did not alter the situation such that CDCP ended up as a public corporation with all the previous private liabilities transferred to the books of public financial institutions.

[11]   This probably led to the following cynical comments by Marx in Capital III: “Public credit becomes the credo of capital …  The public debt becomes one of the most powerful levers of primitive accumulation.”  (Marx 1867: 706).

[12]   Weber’s views on capitalist development are discussed in Hutchcroft (1998 and 1993).

[13]   Remember Eugen Preobrazensky’s concept of “primitive socialist accumulation” for the fledgling Soviet economy of the 1920s.  For a fuller discussion of the concept, see Preobrazhensky (1980).

[14]  According to many local economists, the policy environment is biased because: “(1) it penalizes exports relative to import subsidies; (2) it encumbers non-manufacturing sectors relative to manufacturing sectors; (3) it discourages a more even dispersal of industries across regions because pro­tected finished goods tend to cater to the needs of urban populations and because of the heavy dependence of the same on imported inputs that can only be accessed through the ports that tend to be concentrated; and (4) it impedes the development of small/medium industry because of the inherent advantage of large enterprises in successfully securing favorable tariff rates.”  (Manasan: 1994, pp. 3-4.)

A careful examination of the above-mentioned biases indicate that rela­tively large-scale, capital-intensive, low value-adding, inward-looking, urban-oriented enterprises are encouraged by the post-war Philippine economic policy regime.  In effect, monopolies and rent-seeking in the Philippines are clearly policy-induced market distortions.  However, I do not subscribe to the idea that changes in policy, while necessary, are sufficient by themselves to dis­courage rent-seeking.  There are obvious institutional and market-based sources for rent-seeking stimuli.

[15]  Through the exercise of  “congressional initiatives” and “insertions,” a solon can access funds exceeding the normal annual allocation of P 6.0 mil­lion for a representative and P 20 million for a senator.  For instance, a favored representative from Quezon City gained access to an average of P 300 million annually during the 1992-1995 span.

[16]  A well-placed source informed me that Sanchez was the chief main­tainer of jueteng in Southern Luzon and was grossing an average of P 350 million daily.   In his pay-off list are national-level officials and politicians, high-ranking military and police officials, down to the lowly barangay-tanod (village guard).

[17]  The classic work in the strong society-weak state literature is Migdal (1988).

[18]  Billig (1994), p. 659.  Billig complains against the renewed interest of many observers in the role of culture in economic development: “their reasoning is typically post hoc in that they generate positive cultural scenarios about those societies that have achieved material success and negative scenarios about those that have not.”  He noted that Weber himself believed that Confucianism was an anti-enterprise thought system while recent writers consider it to be pro-enterprise.

[19]  In the May 1995 polls, Juan Remulla was defeated as governor of the province of Cavite by a candidate supported by President Fidel Ramos, ex-director of the National Bureau of Investigation (NBI), Epimaco Velasco.  But the fortunes of the Remulla family seemed to have shifted under President Joseph Estrada.

[20]  Baron and Hannan, “The Impact of Economics on Contemporary Sociology,” Journal of Economic Literature 32 (3): 1131-1132.

[21]  Cook (1987), p. 214.

[22]  Mark Granovetter, “Economic Action and Social Structure: The Problem of Embeddedness,” American Journal of Sociology 91 (3): 481-510.

[23]   The irrepressible Albert Hirschman reminds us of this point.  See  Hirschman (1977). “Exit, Voice and the State,” in A. Hirschman Essays in Trespassing: Economics to Politics and Beyond (Cambridge University Press: 1981): 246-265.  In The Wealth of Nations, for instance,  Smith wrote:

The proprietor of stock is properly a citizen of the world, and is not necessarily attached to any particular country.  He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country where he could either carry on his business, or enjoy his fortune more at his ease. (Modern Library edn., p. 800)

[24]   See footnote no. 17 above for an example.

[25]  In the case of corruption without theft, the government official charges an amount (the bribe)on top of the official price of the good.  He turns over to the government treasury the amount corresponding to the official price and pockets the bribe.  In the case with theft, the official charges a bribe lower than the official price and does not turn in anything to government.

About these ads
Comments
  1. If only I had a buck for each time I came to bongmendoza.wordpress.com.. Incredible writing.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s