Toward a More Complete Theory of Rents and Rent-Seeking

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.

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) are rents created by non-economic, non-state bodies (including churches, mass media, and political parties) but are 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) are “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 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.[1] 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.

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).

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?

Among other reasons, the competition between 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).[2] 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.

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.

Notes:

[1] 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)..

[2] 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.

References

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.

Explaining the Philippine (Non-)Growth Record, 1946-2000: From Independence to Estrada’s Ouster

Explaining the Philippine Growth Record 1946 to 2000

Note:  This is another ‘old’ paper resurrected from my external disks.  I am again sharing it for what its worth.  I intend to update the monograph to cover the presidential administrations of Gloria Macapagal-Arroyo (2001-2010) and Benigno Simeon C. Aquino III (2010-2016) very soon.

Banking liberalization in the Philippines (Last part)

Concluding remarks

 

If one is to assess the efficacy of the banking liberalization using the economic efficiency standards of liberalized markets, then it was a failure.  It did not bring down the cost of money, did not narrow intermediation spreads (the gap between bank borrowing, i.e., deposit rates, and lending rates), and did not increase the supply of loanable funds to the cash-strapped economic groups and sectors, including agri-business and venture capitalists/entrepreneurs.  Under the relatively-constricted terms of financial liberalization, the new banks came in only to cater to the already competitive but still lucrative high-end corporate market.

This lack of potency can only be explained satisfactorily by the mangling of the terms and the intent of the banking liberalization law.  To the extent that the law hewed closely to the preferences of the financial oligopolists, then it signifies another notch up their sleeves.  To the extent, however, that new players have come in and may be able to offer significant competition in the future, then the law can be considered a skillful compromise as well as an opportunity for thorough-going financial openness.  The future course of events is, of course, an empirical matter that could not be settled in this paper.  One can only speculate and perhaps hope for a more competitive financial regime that can offer cheaper credit to all fund users but still able to afford investors with respectable yields and acceptable risks.

REFERENCES

1. Books and Journal Articles

“Liberalization and the Transformation of the Philippine Economy.” Governor’s Page, CB Review 44(4): 1-2.

Alesina, Alberto and Guido Tabellini. 1989. “External Debt, Capital Flight, and Political Risk.” Journal of Development Economics 27(2): 199-221.

Andrews, David. 1994. “Capital Mobility and State Autonomy: Towards a Structural Theory of International Monetary Relations.” International Studies Quarterly 38(2): 193-218.

De Dios, Emmanuel. 1996. “Resource Mobilization and Industrial Organization.” In Financial Sector Issues in the Philippines, pp. 55-82. Edited by Raul Fabella and Kazuhisa Ito. Tokyo: Institute for Developing Economies.

Frieden, Jeffrey. 1991. “”Invested Interests: The Politics of National Economic Policies in a World of Global Finance.” International Organization 45(4): 425-51.

_____________and Ronald Rogowski. 1996. “The Impact of the International Economy on National Policies: An Analytical Overview.” In Internationalization and Domestic Politics, pp. 25-47. Edited by Robert Keohane and Helen Milner. Cambridge University Press.

Haggard, Stephan and Chung H. Lee. 1995. Financial Systems and Economic Policy in Developing Countries. Ithaca: Cornell University Press.

Haggard, Stephan and Sylvia Maxfield. 1996. “The Political Economy of Financial Internationalization in the Developing World.” In Internationalization and Domestic Politics, pp. 209-39.  Edited by Robert Keohane and Helen Milner. Cambridge University Press.

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

Goodman, John and Louis Pauly. 1993. “The Obsolescence of Capital Controls? Economic Management in an Age of Global Markets.” World Politics 46(1): 50-82.

Kurzer, Paulette. 1991. “Unemployment in Open Economies: The Impact of Trade, Finance and European Integration.” Comparative Political Studies 24(April): 3-30.

_______________. 1993. Business and Banking: Political Change and Economic Integration in Western Europe. Ithaca: Cornell University Press.

Lee, Chung H. and Stephan Haggard. 1995. “Introduction: Issues and Findings.” In Financial Systems and Economic Policy in Developing Countries, pp. 1-27. Edited by S. Haggard and C. H. Lee. Ithaca: Cornell University Press.

Mendoza, Amado Jr. 1995. “Who’s Wagging the Dog?: State, Rent-Seeking and Finance in South Korean NIC-hood.” Kasarinlan 11(1-2):149-174.

______________. 1996. “Democracy and Economic Growth: What’s in Store for South Korea?” Kasarinlan 12 (1): 45-70.

Montes, Manuel and Johnny Noe E. Ravalo. 1995. “The Philippines.” In Financial Systems and Economic Policy in Developing Countries, pp. 140-81. Edited by S. Haggard and C. H. Lee. Ithaca: Cornell University Press.

Nam, Sang-woo and C. H. Lee. 1995. “Korea.” In Financial Systems and Economic Policy in Developing Countries, pp. 31-55. Edited by S. Haggard and C. H. Lee. Ithaca: Cornell University Press.

Pauly, Louis. 1988. Opening Financial Markets: Banking Politics on the Pacific Rim. Ithaca: Cornell University Press.

Rosenbluth, Frances. 1989. Financial Politics in Contemporary Japan. Ithaca: Cornell University Press.

Suleik, Mercedes. 1992. “Banking and Financial Reforms in the Philippines (Part 2).” CB Review 44(1):13-17.

Winters, Jeffrey. 1994. “Power and the Control of Capital.” World Politics 46(4): 419-52.

World Bank. 1988. Philippines: Financial Sector Study. Industry and Energy Operations Division, Country Department II.

Banking liberalization in the Philippines (Part 5)

House vs. Senate

Major issues in the legislative debate included how many foreign banks would be allowed to enter, their mode of entry, how much capitalization would be required of the new entrants, and how many branches each would be entitled to open up.  The bill enacted by the Senate in April 1994 (SB 1606) was far more restrictive than that earlier passed by the House (HB 8226).  It permitted only six to eight new entrants (rather than leaving the matter up to the Monetary Board, as did the House bill), required $16 million in capitalization (rather than the roughly $5 million required by the House), and sanctioned only six branches for each of the foreign banks, whether existing or new entrant (rather than giving the foreign banks the same privileges as the domestic banks).  As to the mode of entry, SB 1606 hewed closely to the Angara-Roco-Ople version.  First, it disallowed the entry of foreign banks as a wholly-owned and controlled subsidiary incorporated under Philippine laws, which the House version permitted. Second, while HB 8226 allowed foreign banks to own up to 70% of the voting stock of an existing Philippine bank, the Senate version limits foreign ownership to 60% of a bank, whether existing or newly established.  Third, the Senate version restricts the entry of foreign banks to only one mode of entry.  The appropriate section of SB 1606 read:

Sec. 2.  Modes of Entry. – The Monetary Board may authorize foreign banks to operate in the Philippine banking system through any of the following modes: (I) by acquiring, purchasing or owning up to SIXTY PERCENT (60%) of the voting stock of an existing bank; (ii) by investing in up to SIXTY PERCENT (60%) of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided, further, That a foreign bank or a Philippine corporation may own up to sixty percent (60%) of the voting stock of only one (1) domestic bank or new banking subsidiary.

How the banks positioned themselves in the debate

The major argument of the BAP was that, to ensure a ‘level playing field,’ foreign and domestic banks should have the same minimum capitalization requirements ($27 million for non-unibanks).  On the question of branches, however, they desired a most uneven field: retention of the three-branch limit for foreign banks, thus ensuring that the vast bulk of depositors would remain outside the reach of external competition.  As the debate heated up, the BAP waged a media campaign to weaken the extent of actual liberalization and support the more restrictive Senate bill.

The four foreign banks already in the system—in particular Citibank, by far the largest and most influential of the four—actively supported the less restrictive terms of entry.  It is believed that while these banks would be most directly affected by the entry of new foreign banks, a strong desire for more branches was apparently a stronger consideration.

As the bicameral conference committee convened to reconcile the differences between the two bills, tensions escalated between House and Senate, foreign and domestic banks, avid and reluctant reformers.  After deadlocks among key sponsors, the House and the Senate forged a May 1994 compromise allowing the entry of ten foreign banks and sticking with the Senate’s earlier six-branch restriction on the scope of their operations.  Minimum capitalization of roughly $9 million allowed three branches, and $13.5 million the rights to six.  The new law also provided a second mode of entry for foreign banks: up to 60 percent ownership of a domestically incorporated bank (as compared to the 30% to 40% permissible since the 1970s).  The BAP made no effort to hide its pleasure over the compromise; BAP president Rafael Buenaventura[1] explained that the final law “met [our] standard in terms of balancing the national interest with the country’s need for globalization without making too many unnecessary concessions.”[2]

Twenty-one banks applied for entry and in early 1995 the ‘magic’ ten were selected.  These include Australia and New Zealand (ANZ) Bank, Bangkok Bank, Chemical Bank, Development Bank of Singapore, Deutsche Bank, Fuji Bank, International Commercial Bank of China, Internationale Nederlanden Groep (ING) Bank[3], Korea Exchange Bank, and Bank of Tokyo.  Three of these banks—Chemical, Deutsche, and Tokyo—were not exactly new since they had offshore banking units (OBUs) in the country prior to 1995.  By 1996, all had opened shop—and by the way they did so it was evident that their direct impact on competition would likely be confined to the very top end of the market, which was already competitive.  In general, they established offices on the upper floors of Makati skyscrapers and did not bother with the expense of lobbies or tellers.[4]  In effect, the new banks will compete in the corporate banking and trade financing, segment of the market where there’s already keen competition.  Even Citibank, the only foreign bank that may begin to have the institutional strength to tap a larger segment of the market, shied away from the market’s lower end.  It has yet to complete the six-branch quota since it only has four branches so far—Makati, Greenhills, Libis Citi-Square (the newest branch inaugurated by no less than President Estrada last April 2000), and Cebu.

To be concluded….

___________________________________________________________

[1] Mr. Buenaventura is the current governor of the Bangko Sentral ng Pilipinas (BSP).

[2] Rafael Buenaventura, “At the Forefront of Change,” Fookien Times Philippines Yearbook 1994, p. 180.

[3]When the British merchant bank, Baring Brothers, collapsed due to the uncontrolled trading of a rogue trader, it was acquired by ING.  In the process, ING Philippines also acquired Baring Securities (Philippines).

[4] Of the ten, only the Development Bank of Singapore (DBS) opened more than one branch, presumably to better oversee remittance of foreign exchange by Filipino OCWs in Singapore to relatives in the Philippines.