The Economics of Pakistan’s Rent-Seeking Imbroglio

The Economics of Pakistan’s Rent-Seeking Imbroglio

The expression of rent-seeking has its origin during the times when the feudalism emerged in its established manifestation. In that kind of setting, a landowner would get the rents of the land due to his ownership over that land and not by the virtue of his hard work or any other input in this regard. Later on, the expression of rent-seeking also encompassed the rents by the virtue of monopoly – these rents are gained due to certain monopoly, which otherwise would not be possible if there were competition in the market. Individuals can also be identified to be seeking rents whilst they are attempting to acquire benefits for themselves via political domain. They typically do so by means of getting a subsidy for a commodity they produce or for being in a particular class of people, through getting a tariff on a commodity they produce, or by means of getting a special regulation that hampers their competition.

Rent-seeking is basically associated with power. It means that rent-seeking may be perpetuated via a nexus of power with diverse privileged groups. This sort of symbiotic linkages could be very visible in Pakistan’s social order, in which numerous elite factions for long have been into an unholy coalition for rent-seeking.

Burgeoning corruption and nepotism in Pakistan’s bureaucracy, which in general is comprised of kith and kins of those who either are in power or have connections to power corridors ensure the subjugation of a common person and employ state machinery for their personal interest maximization. The nature of government over past few decades in Pakistan can rightly be labeled as a nexus of bureaucracy, politics and white-collar crime, dominated by a club of predacious elite factions, who espouse only their own interests employing their influential positions in the state machinery.

There is no disagreement over the deep penetration of rent seeking mechanisms in Pakistan, since its inception in 1947. In Pakistani society, rent-seeking can be observed in diverse arrangements and manifestations. Like every society across the world, here too exist a dominant faction within the society which comprises different groups of elites i.e. feudal elites, industrial elites, bureaucratic elites, religious elites and others. This dominant faction of the society is very well known for their rent-seeking activities in which they are deeply immersed one way or the other. They are the actual beneficiaries of the whole social order – commonly known as system, which is constructed on the basis of rents and privileges. That is why even the most ambitious of initiatives to reform the overall system and overhaul the institutional structures fail to provide desired consequences – owing to the resistance by well-ingrained interests that these reforms are speculated to harm. The rent-seekers, who have accumulated gigantic opulence, stimulate and direct the state machinery in such a way that promotes rent-seeking mechanisms.

Rent seeking has turned out to be so entangled in Pakistan’s economy

Rent seeking has turned out to be so entangled in Pakistan’s economy and organizations that the state has nearly lost its authority to efficaciously put into effect the social contract. It does not carry out primary functions effectively like regulation and maintaining law and order, effectual dispensation of justice and effective service delivery. The state cannot collect due taxes owing to the fact that rent-seekers have accrued strength and authority up to the extent whereby they bend the laws in their favor. Every so often, it isn’t always individuals who bask in rent-seeking activities but interest groups and organizations as a whole are engrossed in rent-seeking, that together protect their pursuits. For instance, a few services groups within the Pakistani bureaucracy will not let reforms succeed with the intention to keep their dominance in the state machinery intact and their fortunes forever green. At times, the rent-seekers in organizations join hands to abridge the organizational accountability futile.

The configuration of rent-seeking in Pakistan is established on four major components. First includes regulations, immunities, subsidizations, and licensing. Second encompasses those privileges one acquires or is entitled to by the virtue of being part of some particular interest group or class. Third comprises the excess of land in the hands of a minority class – the landed elites, commonly known as feudal elites, which has not essentially been procured by any struggle or by blood and sweat. Fourth category is of the distinctive privileges to the private housing authorities or other housing schemes owned or controlled by the elements in state machinery.

Pakistan has had an extensive structure of subsidizations, rebates and export vouchers etc. since its inception in the year 1947, where few segments of economy got special treatment by the organs of the state. The influential business interest groups effectually lobbied for exceptional and the kind of tax treatment that would be beneficial to the business community, irrespective of the fact that this approach may be harmful for the economy at aggregate level and for the state itself. The subsidies dispersed to large State-Owned Enterprises (SOEs) like Pakistan International Airlines (PIA) and Pakistan Railways are principally a drain on the national resources.

Statutory Regulatory Orders (SROs) is another tool used by rent-seekers in Pakistan, where giant industries get absolved from custom duties and taxes through an SRO. A legislative tool like this one serves as a cradle for rent-seeking opportunities, not only for a specific sector or industry but more importantly for those who are directly or indirectly involved is some way in the issuance of such SROs.

Another component of rent-seeking system in Pakistan is connected to the perks and privileges bestowed upon the Civil Services of Pakistan, predominantly a few groups within it. Large residential houses at the level of districts and divisional headquarters, to be found in the high-class zones of the big urban centers are an immense source of rent-seeking. This kind of rent-seeking not only generates distortions across the housing market but also a clear manifestation of discrimination amongst diverse cadres and service groups. Hypothetically, two government employees might be employed on the similar pay scale and entitled to the equivalent perks and privileges which may include housing and conveyance. Nonetheless in practice, one employee may be receiving house rent not enough to have a decent living in the open market of housing, while the other relishes himself with a government-owned accommodation straddling over a large portion of land. The market price of such an accommodation is usually many times higher than the house rent permissible to the other government employee. Appointing favorite ones for foreign trainings and postings and transfers through kith and kins or powerful friends is also the dilemma of civil services’ rent seeking mechanisms.

Lastly, after all why is rent-seeking considered so unfair? It is depraved as it decreases the economic and institutional efficiency by impeding competition. Plethora of literature on rent-seeking also pronounces that it kills innovation. Public rent-seeking assaults innovation, since innovators require state supplied goods, which would include permits, licenses and others, much more than the conventional producers would ever require. Innovators have no conventional lobbies and are usually not a part of the dominant faction. In contrast the conventional producers, innovators are every so often credit-constrained and cannot as simply find the money to pay bribe. Therefore, the argument is that rent-seeking inhibits economic growth and dampens the formation of new businesses and must be countered via multi-pronged strategies.

About the author

Saddam Hussein

The author Saddam Hussein is a Research Economist at Pakistan Institute of Development Economics (PIDE), Islamabad. He graduated from the School of Economics, Quaid-i-Azam University (QAU) and also holds Master of Philosophy degree in Public Policy from PIDE. Hussein writes regularly for national and international print media, frequently appears on TV for expert analysis and conducts training workshops on a wide range of thematic area.