NEVIS REVIEW No 8
Section I
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
costy@costantinos.net.]
