30 September 2009

Rent-Seeking as Bad as Money Laundering. Are Sri Lanka Airport Taxis a Prime Example?

22nd September 2009, www.lankabusinessonline.com By W A Wijewardene

Rent-seeking, the use of one’s time, knowledge and efforts to earn an income which is not directly contributory to the national wealth, has been frowned upon by economists for many decades.

Jagdish Bhagwati, Columbia University economist, branded India’s economy as a paradise for rent-seekers when India had everything under control, nicknamed ‘licence raj’, since independence in 1947 to mid 1990s.

He in fact coined the phrase ‘directly non-productive economic activities’ to describe India’s vast-spread rent- seeking economy.

Rent-Seeking is as Harmful as Money Laundering

Like money laundering, rent-seeking too is harmful, injurious and inimical to the good health of an economy.

However, the irony has been that, politicians in both developing and developed countries, while taking action on a global basis to outlaw money laundering, have by word and by deed promoted opportunities for ‘rent- seeking’ in their respective economies.

Hence, the recommendation which mainstream economists often make to policy makers in governments that a full-stop should be placed to rent-seeking if an economy is to grow on a sustainable basis has been largely left unheeded.

Normal Economic Activities

How does rent-seeking differ from normal economic activities? In a number of ways.

In a normal economic activity, all the people who are involved in the economic activity make a value addition to the activity thereby contributing to create wealth. Hence, the removal of anyone from the process would reduce the value and make it impossible for the activity to take place. In other words, everyone involved in the activity makes his or her living by adding to the value. Therefore, the payment he or she would receive for the services provided is not at the expense of the others.

Take, for example, rice production. Farmers produce paddy by toiling the land and using other types of inputs needed for that.

Millers buy that paddy and mill into rice consumable by consumers.

Wholesalers and transport providers bring that rice to the market and distribute among retailers.

Consumers buy rice from the retailers and enjoy a good rice meal.

All these people add value to rice at every stage and provide an essential service to the process of making it available to the ultimate rice-eaters. The removal of anyone from the process would interrupt its smooth functioning and impose hardships on others in the process.

For instance, if the miller is removed, either the farmer or the wholesaler or the transporter or retailer or the consumer has to mill the paddy before consumption. It is not impossible, but it entails an additional unwanted hardship that each party would impose on himself or herself.

Similarly, the removal of any other person from the process would require the others to devote their time, energy and effort to provide the service given by the removed person. Thus, in normal economic activities, all the people involved are essential, all of them add value to the production and payments received by all of them are fully justified.

Room for Rent-Seeking

How could this smooth economic activity be distorted, giving room for rent-seeking by some?

Suppose, hypothetically, the government makes it necessary for transporters to obtain a ‘transport licence’ to take paddy or rice from one place to another. To issue the licence, the government has to appoint an officer or establish a bureau. To police it, it has to set up road blocks at strategic places and appoint further officers to man them.

Then, it has to strengthen the judiciary and prison services to try and execute punishments on the violators. The salaries paid to all these officers or the costs of running all the bureaus do not add value to production of rice. Hence, they could be removed without affecting the production, transportation and consumption of rice. Since the government’s intervention does not add value to rice production or is not necessary for the process, the costs incurred thereon represent a loss where no one gains meaning a ‘deadweight’ loss and an opportunity for some people to earn a rent.

When people realise that earning this income is easy and convenient, everyone flocks to seek it, thereby creating a rent-seeking economy. Once it becomes wide-spread, it is impossible to dismantle it as has been experienced in many countries.

Though people appear to have been employed and doing a service, they, in fact, do not add anything to the national wealth and live on the wealth created by others. They eventually grow like a parasite that constantly feeds on the body of a person. Once the person is no longer able to sustain, both the person and the parasite will see their end.

The Dangers of Rent-Seeking

That is why economists frown upon rent-seeking and prescribe policies to eliminate it.

It reduces efficiency, induces people to use their resources unproductively for rent-seeking activities, contributes to create an underground economy and promotes money laundering. From a morality point of view, it also leads to immoral and unethical practices on which courts are subsequently called upon to pass judgments. Hence, once an economy becomes a rent-seekers’ paradise, its unproductive activities thrive and its production base dwindles, making it difficult for the economy to sustain itself. Eventually the old glory of the economy will become a matter in the past.

Rent-Seeking at Katunayaka Airport

The writer had a first-hand experience in rent-seeking at the official taxi service operated by the Katunayaka Airport Authorities.

Every airport has a taxi service (some even a coach service or a fast train service) to facilitate air passengers to travel from the airport to their desired destinations. Since most of the planes land in the night and other public transportation services are not available at that time, airports have assured safe, comfortable and convenient travel to passengers through their official taxi services.

In the case of foreigners, the quality of this taxi service is their first impression of a country.

Hence, countries have taken an extra effort to provide a quality taxi service at the airports, so that foreigners have an incentive to visit the country again and again. The countries desiring to promote tourism as a main economic activity have looked after their airport taxi service well. Some notable examples from the region are Singapore, Thailand and Malaysia.

Taxi Counter Employs Unnecessary Staff

At the Katunayaka Airport, when one steps out of the Customs Barrier, there is a counter at which a passenger could hire an airport taxi. When the writer approached the counter, there were two male officers behind the counter and both of them were holding their hands to ears speaking on mobile phones.

None of them thought it necessary to service the customer who was now waiting at the counter. After about five minutes, one of the male officers, while still being on the call, waved his free hand to someone inside and a lady officer stepped to the counter to take the order from the writer.

The employment of three officers to write taxi orders at the counter was in stark contrast to the single-person manned taxi counters one could see in many countries. In fact in Singapore, the order writing counter has been completely abolished by creating a ‘taxi queue’ outside the terminal with only one facilitator to direct passengers to the appropriate taxis which also wait in line to receive passengers. The additional people who work at the counter at Katunayaka are, therefore, rent seekers who do not add value to the service and without whose service, the taxi service could well be run.

After the order has been produced on the computer print-out, another person has been employed to escort the passenger to the appropriate taxi along with the order paper. This person’s service appear to be essential, because taxis are not lined up in the order of the orders issued and passengers find it difficult to identify the correct taxi for which the order has been written. But, in a market where the taxis are lined up in some order and the order papers are issued in that order, this additional person’s service is not needed. Hence, though it appears that he is engaged in some service, the taxi service, with proper order of taxis lining up, could be run without him.

What one would find at Katunayaka are not taxis which one would find at other airports. These are simply box-like little vans which do not have air-conditioning and are incapable of smooth driving. On many occasions, in addition to the passengers, drivers too take upon themselves the chance to provide a free ride to their friends who also travel on the same route after completing their duties at the airport. Passengers, though unwilling and reluctant, do not have a choice and acquiesce passively. It raises the important issue of safety of the passengers if the travel is in the night.

Inducements for Private Rent-Seeking

The basic factor is that these box-service operators do not get enough business to sustain themselves. They do not get enough business because they provide a sub-standard service. Hence, the drivers try to negotiate with passengers some private hiring presumably without the authority or the knowledge of the airport authorities. According to the drivers, the box-like vans are owned by private operators who have registered their vans with the airport. Airport authorities too would have succumbed to the pressure from influential parties to register those sub-standard vehicles.

It is, therefore, a full-blown rent-seekers’ paradise at the Katunayaka Airport. But, the bad image which it has created in foreigners and other local passengers cannot be easily removed.

How to Eliminate Rent-Seeking?

The source of rent seeking is governments’ monopoly building in providing services and introduction of rules, regulations, licensing requirements and interventions in the market activities. All these are done by governments in the name of promoting and safeguarding public interest. But, they also generate unintended consequences in the form of breeding rent-seekers living on the wealth created by other productive workers.

Hence, to eliminate rent-seeking, the expansion of the governmental activities has to be stopped, if the governments have already expanded, a greater part of such activities should be handed to private people and if the governments need to handle some of them, they should simulate private sector in running those activities.

In addition, unwarranted rules, regulations, licensing requirements and intervention in the markets should also be dismantled or halted.

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