Monday, January 14, 2013

NEVIS REVIEW No 8 Section I : Ref # 8.1


Ref # 8.1
January 14, 2013

The Developmental State and Rent Seeking
 by Costantinos BT Costantinos (PhD)

An agonised logic paralyses dialogue proximate to economic growth trajectories in Africa. Predominantly, it reflects the post-nineties shift in the New Economic Policy here at home that has decisively contributed to high growth rates, with claims of the contribution of real cost reduction that is higher than in any of the high-growth experiences recorded in emerging markets. In spite of decades of decadence, the African economy has recently been growing rapidly and provides opportunities to integrate investment with a strong economy to finance development within. The global recession, is now putting renewed pressure on African economies that exhibit a self-reinforcing dynamic of lethargy and hypnotic growth-cum-livelihood insecurity equilibrium. The later continues to generate tumultuous challenges stemming from double-digit inflation and depreciation of the Birr that have escalated pressure on investment revenues, remittances and swelling import costs. While programmes were adopted to address the strains, seeking a balance among conflicting objectives, i.e., restraining inflation, building reserves and capacity for higher capital outlays, tight fiscal stance, slowing the velocity of monetary growth and calculated real exchange rate adjustment, is indeed a major preoccupation.
Stirring up and sustaining structural transformation will in effect beckon for a coordinated change in the structure, level and complementarities of the private and public investment, which will create functioning markets. Accelerating growth will hinge on greater levels of capital stock that would increase, in turn, the rate of return of private investment, which, in addition to a suitable investment climate, is critical to accelerate growth and trigger a process of virtuous change based on market integration, labour law amendment & productivity improvement to build confidence the developmental state model that is destined to marshal the disengagement of self-fortifying policy trajectories. Prudent implementation of these reform courses will provide a sound environment for growth, coupled with financial support under the exogenous shocks facility and IMF’s Special Drawing Rights.
The Developmental State:

The UNECA has made the developmental state a model for African development in its 2011 Economic Report. Needless to say, there are both supporting for and counter arguments against UNECA’s submission. Indeed it is the ideology-structure nexus that distinguishes a developmental state; it is essentially one whose ideological underpinning conceives its mission and establishes as its principle of legitimacy by ensuring high rates of accumulation and industrialisation, where an élite coalition establishes an ideological supremacy around which key actors adhere voluntarily. Such characterisation of the developmental state notwithstanding, it runs the risk of being repetitious, redundant, reiterative and pleonastic; since evidence is often drawn deductively from the performance of the economy that equates economic success to state strength while measuring the latter by the presumed outcomes of its policies. It has led to myopic focus of scrutiny around success to the neglect of the trial and error nature of policy-making, even in the most successful cases. If a developmental state is not be defined as an invincible regime locally, then the definition must include situations in which exogenous structural dynamic (such as the global economic crises) can torpedo genuine commitments and efforts by the state.
Mkandiware, a leading intellectual in the discourse, alludes to the fact that the developmentalist position has become bewildering to many, as influential strands of radical scholarship continued to question whether the ‘peripheral’ parts of an increasingly inter-connected global economy could ever hope to escape the predations of the established industrial heartlands. Ironically, the increasingly positive, not to say self-deluding, sentiment that developed about Asia encouraged a flood of speculative capital into the region, fuelling a rising tide of expectations and asset values as a consequence. The distinctive role of the region’s interventionist political elites was the object of particular attention as what were formerly seen as ‘strong’ states were now depicted as centres of self-serving corrupt states. This remarkable change in the conventional wisdom was mirrored in, and drove, an externally imposed reform agenda, which was intended to completely reconfigure what was distinctive about Asian developmental states. Most of the analyses about African states that have led to so much despondency about prospects of development are based on invidious comparison between African states in crisis and idealised and tendentiously characterised states elsewhere.
The African state is today the most demonised social institution, vilified for its weaknesses, its over-extension, its interference with the smooth functioning of markets, its repressive character, its dependence on foreign powers, its ubiquity, its absence, etc. The state, once the cornerstone of development, is now the millstone around otherwise efficient markets. The many epithets: the rentier state, parasitical, predatory, lame leviathan, patrimonial, prebendal state, kleptocratic, inverted state, and others underscore the fact that not only has the state become dysfunctional in terms of the larger societal issues, but also a real nuisance in the life of its citizens. The shift in attitudes is attributable not only to the dismal performance of states in the lost decade of Africa, but also to a number of ideological, paradigmatic and structural shifts in both the domestic and international spheres. It is not only predicated on the dazzling triumph of the Asian Tigers that led to a re-reading of the role of the state in the development process, but it has also raised the question of replicability of their market-driven export-oriented strategies which led to efficient exploitation of the comparative advantage in cheap labour.
Market failures and neo-patrimonial rent seeking

The failure of central planning in socialist countries pointed to government failure as more insidious than the market failure that state policies had purportedly been designed to correct. Balassa and Little assert that consequently, the most important case against developmental states is not faith in flawless markets, but rather the degree and extent of market failure states cannot correct. While it is now admitted that the state has played a central role in the development of Asian countries; what emerges in the literature is that what has obviously worked in other late industrialisers is simply a non-starter in Africa. This is because of dependence, lack of ideology, softness of the African state, its proneness to capture by special interest groups, lack of technical and analytical capacity, changed international environment that did not permit protection of industrial policies and poor performance. While greater political insulation of economic policy makers could reasonably be achieved in African countries, the extensive coordinated economic interventions of the Tigers are well beyond the administrative faculties of African states.
The neo-Weberian critique has focused on the failure of African states to establish themselves as rational-legal institutions and to rise above the party apparatchik, regardless of their ideological claims and the moral rectitude of leaders. Göran Hyden posits that going back to the functions that modernisation had assigned to the state, the neo-Weberian highlights the flawed nature of the performance of the post-independence state, especially in its relationship with a society from which it has not been able to distance itself adequately so as to perform efficiently. In these accounts, market failure, central to development economics and government failure central to neo-classical economists, are replaced by something more debilitating and more recalcitrant societal failure signalled not only by lack of social capital, but also by the disease-like spread of this societal malaise into both market and state structures. Africa’s primordial patrimonial relationship, the economy of affection, has eaten into the core of modern state edifice, rendering it weak and incoherent. The most cogently stated of these critiques is that of public choice school with the work of Bates, which starts from assumptions of how unregulated markets are said to operate in a Pareto optimal way in the sense that the allocation of resources that they generate is such that it can only be improved upon by making somebody worse off. Given that markets work well, why are market distortions by the state tolerated or generated? The answers lay in the rational pursuit of organised self-interest groups or individuals who push the state to adopt policies that generates rents for them. The state is then essentially a rent engendering institution that inhibits gainful allocation of capital.
In such a literature rent seeking invokes the expenditure of resources to capture artificially created rents. It should be stressed that the point of departure of rent seeking literature is the perfect market. In real life and, indeed, by this definition, rent would be ubiquitous in any situation in which a state existed to safeguard or transfer rights. While the concept points to something real in most economies, it has been made to carry more than it can bear. In the case of Africa, rent seeking is conflated or used interchangeably with corruption and clientelism. Rent seeking usually involves redistribution of income from one group to another. The effect of such redistribution on growth depends on its impact on incentives and the use to which the winners put the surplus in their hands.
On the emergence of African capitalism, Catherine Boone observes, will wealth collected in the form of rents be transformed into capital through productive investment? Other than the easy come, easy go thesis, are there a priori reasons to believe that only the wealth earned by one’s efforts will be used productively. Such is the dilemma so much so the rent seeking literature has tended to blur the distinction between micro-economic distortions and macro-economic imbalances, tending to believe that the latter was the logical consequence of the former. It is now generally evoked against active policy making even in directions that have been theoretically and empirically demonstrated to be beneficial. It has become the great caveat that brings the apparently inexorable logic of market failure to a dead halt.
Yet many of the policies attributed to rent seeking and identified as the cause of state failure have been and are still in use. While micro-economic distortions were costly, what eventually drove many import substituting countries to ruin was not so much the inefficiencies induced by rent seeking, but macro-economic imbalances that are not easily attributable to rent seeking groups. Even in the context of new growth theories, we simply do not have evidence on the precise channels through which rent seeking adversely affects such variables as growth, if at all. In looking at some of the advice given to African countries, it turns out that what are wrong are not rents per se but rents attached to a wrong strategy. This partly explains why advocates of export-oriented strategies admit, albeit surreptitiously and reluctantly, to the need to deploy rents to stimulate export-oriented industries.
Akyüz advances the proposition that the creation of rents and the pushing of profits over and above those that would be attained under free market policies were central to the process of accelerated capital accumulation and growth and establishing of new industries by providing a profit-investment nexus that undergird the high corporate savings and investments of Asia. He suggests five reasons for the success in the linking of rent creation to promotion of industrialisation. Rents were achievable through activities, which served national interests. Rent seeking costs (information, influence peddling, etc.,) were kept low.
Governments acted to close off non-productive channels of wealth accumulation such as urban real estate speculation. Rents were provided on a selective and temporary basis and withdrawn as new industries became mature enough to compete internationally. The realisation of rents was related to performance standards. The point of the Asian experience is that the use of rent seeking as an argument against a more active developmental state is simply not credible. The relevant issues are rents for whom and what reciprocal obligations exist for receivers of such rents?
Delinking the state from rent-seekers:

I have been on record saying that the role of the state in achieving rapid and sustained economic growth and development combined with deep structural transformation must be channelled through a disciplined planning approach… such a role is best performed by states operationalising transformative institutions that are both developmental and democratic. Nevertheless, awkward comparisons of African entrepreneurs against Western capitalists and the fear of state capture by corrupt ‘traders’ have led to a naïve realism of public power and private interests, a view that pre-empts or precludes the possibility of building elite developmental coalitions. If market entrepreneurship is to be practicable, it must be augured on the aptitude, faculty and competence of an indigenous entrepreneurial genre. The state, as a regulatory organ, has to direct state policy toward nurturing indigenous capitalist accumulation by facilitating institutions of stabilising capital-labour relations and supplying technical services and physical infrastructure. Social entrepreneurs on the other hand must convince the nation that capital accumulation is in the national interest, while acquiring the capacity for thriftiness and investment and organisational capacity not only to manage one’s enterprise, but also impose self-discipline.
A process of continuous educational and technological innovation, industrial upgrading and diversification and improvements in the various types of infrastructure and institutional arrangements constitute the context for business development and wealth. As witnessed in the experience of all countries that have successfully transformed from agrarian economies to modern advanced economies, however, market mechanisms may not be sufficient and the government has a potential role to play in helping such entrepreneurial ventures. Think tank driven knowledge and innovation, human capital institutions, infrastructure and policies, including fiscal, monetary, exchange rate, capital flows and trade policies, are important for success. Critical human skills are of essence in the establishment and development of capital markets. The quantum of skills in the state is key to the positive role of government aligning financial intermediaries that convert savers to investors, the principal clientele of markets.
Advocating a stronger role for the state in development should neither be seen in terms of the old and tired debate of state versus the market. Nor should it be understood that the private sector should not remain the only engine of growth. The issue is not whether the state, like the market, should play a role in economic transformation but rather how to strengthen their capacity and accountability to design and implement more effective policies and strategies. Events of many emerging economies’ success stories provide valuable lessons that may not simply be transplanted… In the interminable faculty of think tanks to innovate and an unquenchable desire to reinvent, developed nations reap the developmental booty of an exceedingly proactive and skilled entrepreneurial leadership.
Like Ghana and Brazil, state planning and policy-making must be based on on-going dialogue; a coherent and coordinated approach between different government agencies in their dealings with the business community; flexibility in response to global phenomena and emphasis on achieving high levels of performance. Beyond GDP growth, performance anatomy is perhaps the most elusive characteristic of all great economies. Nonetheless, interaction between leadership and strategy, technology and human capital development, meritocracy, performance measurement and innovation, are critical to defining a high-performance market economy that lifts nations out of penury.
[Ed’s Note: Costantinos (PhD) is an economist by training and currently teaches Comparative Public Policy at the School of Graduate Studies at the AAU. He can be reached at]