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Article Excerpt
Abstract
This paper points out, in the changing institutional setting of transition in Romania, Some relevant factors influencing economic actors to behave in a way that pushes them to devote resources to unproductive goals, rather than to embark on activities that add economic and social value. The theoretical insights offered in the literature of rent seeking are applied to the issues of transition. A mathematical model of a rent seeking economy is presented, analyzing the influence of interest groups activity on the overall income of the economy. Some examples of rent seeking behavior that severely hamper the economic efficiency are illustrated for the case of Romania. The conclusion is that, in appreciating the progress in transition, the reduction in rent seeking is an important factor to be taken into consideration. (JEL 057, 050, D23, L51)
Keywords: transition countries, rent seeking behavior, unproductive activities, clientelism
Introduction
The transition offers a unique opportunity for economists and policymakers to analyze a dynamic historical process, imposing change on almost every element of society. Any alteration of the economic rules entails winners and losers, and the conflict emerging between them had important consequences for interest group activity. First, winners had to organize and fight for the protection of their privileges, as well as looking for collusion with the administration. Next, losers have been loudly requiring protection from the state. As a result, the activity of both parties has been strengthening the position of the administration, which offered widely inclusive regulation.
In this paper the theoretical insights offered in the literature of rent seeking are applied to the issues of transition. Rent seeking has been shown to be very costly to economic growth and investment as it increases the cost of doing public and private business, clouds the business environment with uncertainty, and distorts the regulatory and legal framework on which businesses rely. Not surprisingly, rent seeking seems to have expanded during the transition period in former communist countries, when institutions of restraint were weak and rules governing society and businesses were rewritten wholesale.
It is important to observe that the three pioneers of the rent seeking literature--Gordon Tullock [1967], Anne Kreuger [1974] and Jagdish Bhagwati et al. [1984]--had all spent a lot of time in the Far East, in economically backward regions. The relationship between rent seeking and economic problems becomes obvious, being an incentive for the analysis of transition countries. The rest of this paper is organized as follows. The following two sections try to identify the causes and consequences of rent seeking activities. Then a mathematical model of the rent seeking economy is presented. Next some examples of rent seeking behavior that severely hamper the economic efficiency are explained for the case of Romania, illustrating the conclusions of the mathematical model. The last section provides concluding remarks.
Causes of Rent Seeking Behavior in Transition Countries
The typical assumptions that mainstream economists like to make (studying economic agents as units that maximize a relevant profit function) are simplifying the economic reality and deservedly come under severe criticism when applied to the problems of transition countries. In these countries the criterion of survival rather than that of maximization is encountered at all levels, including politics. Political leaders and their appointed and dependent bureaucrats have to focus consistently on their political survival and ensure adequate political support from social groups. The dominance strategy they use is a simple trade: Material advancement in exchange for political loyalty and support.
Tornell and Lane [1999] employ a model to show endogenous institutional reforms that have been adopted in the context of economic crisis and drastic political change. It is individually rational for groups, in the course of their rent seeking, to drive the economy to a crisis. They behave voraciously even though they know that when a crisis occurs, there will be a conflict and a reform will take place. That reform is the tool used by some powerful groups to limit the power of their political opponents by making rent seeking impossible for everyone. So reform in developing countries comes as a result of political struggle rather than social welfare maximization.
Sometimes, rent seeking appears because the highest return is found in the exercise of political pressure and not in involving in value-adding marketable activities. As long as the capital stock contains too much that is worthless, so that its improvement involves serious social costs, the government is always subject to being held up for ransom by the holders of economically worthless assets. So it becomes difficult for the political system to effectively resist pressures for large-scale redistribution [Frydman and Rapaczynski, 1994].
The excessive central control may lead to rent seeking situations. For example, in Russia, the control of sub-national budgetary operations by a 'benevolent' central government may increase social welfare, but at the expense of higher (implicit and explicit) taxation of economic organizations in the region, lower output, and a strong orientation of informal policies toward rent seeking activities. Allowing for the possibility that the region may under-fulfill the formal budget and divert resources 'underground' creates still further problems, particularly in the Russian case of revenue sharing between budgets. All these aspects lead to the recognition that the central government is part 'Leviathan,' with an agenda that does not completely coincide with the pursuit of social welfare.
In general terms, rent seeking has developed in countries situated far from direct influence of Western Europe and closer to the former Soviet Union. The countries in the first wave of...
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