The rent seekers

EDITORIAL: Prime Minister Imran Khan constantly expresses his ire against those he describes as ‘the mafia’ who, in economic terms, can best be described as rent seekers or those individuals or entities who seek to increase their own wealth through manipulation of the country’s economic resources without generating any societal benefits.

It is, however, important to note that rent seekers are not unique to Pakistan as they are found operating throughout the world. A recent example was the 2.2 trillion dollar economic stimulus package by the Trump administration which led rent seekers to purchase their own shares leading first to an artificial boom on the stock market which was then followed by a subsequent bearish trend on stock market.

Prime Minister Imran Khan has repeatedly stated that he desires manufacturing companies to earn profits as that generates wealth for the country which would generate employment and raise the country’s GDP. And yet economists the world over have begun to challenge the efficacy of the trickle-down theory as it has instead led to greater concentration of wealth. This mindset has led the Prime Minister to grant another round of exemptions in his industrial policy to new investors (local, overseas Pakistanis) or those operating outside the legal economy under the third amnesty scheme during his three and a half years in government.

He also expressed the hope that those currently investing in land will instead invest in productive activities; however, time will tell whether such a transition from what is regarded as zero to low risk activity to high risk business venture for which the real estate owner may have no aptitude or inclination is successful. In addition, the actual cost to the national exchequer of this policy is not yet determined and one would hope that some empirical evaluation study is carried out concurrently to the industrial policy launch so that the cost to the economy may be minimized.

The major thrust to fuel growth today subsequent to the reduction in the budgeted Public Sector Development Programme (PSDP) by over a quarter of a billion rupees is to extend loans to small and medium enterprises, youth, farmers and other vulnerable groups without collateral at zero interest rate. While one may understand the salutary motive behind this decision yet one would have hoped that appropriate mitigating measures had been first put in place including: (i) ensuring that the loan is not hijacked by the influentials as previous administrations had also given small loans at zero interest dedicated to the poor but which were hijacked by the rich; (ii) the borrower must submit some business plan and exhibit some familiarity/expertise in his chosen field; (iii) given the large number of non-performing loans in this country, the government guarantee to private banks for loans at zero interest may raise the budgeted markup significantly whose impact will be borne by the general public in terms of even less outlay for PSDP and higher inflation; and finally (iv) loans at zero rate by themselves do not fuel productivity as the stimulus packages revealed in most Western countries.

In addition, the range and extent of the rent seekers in Pakistan is perhaps larger due to the formation of functioning cartels operating even in those commodities where perfect competition prevails in other countries (attributed to the presence of a large enough number of buyers and sellers unable to influence price) — commodities that include sugar, cement, textiles, milk, poultry feed, etc. While the onus of ensuring that there is no collusion to set price rests with the Competition Commission of Pakistan (CCP) yet its raids/operations are rendered toothless through stay orders. There is therefore a need to strengthen the CCP both financially and through induction of enough lawyers able to vacate these stay orders.

The poorly performing electricity sector too has been marshalled by the rent seekers with Business Recorder repeatedly urging the government to launch/implement an electricity futures market that would end their extraordinary rents. It is important to note that rent seekers evade or avoid taxes by taking advantage of existing loopholes which need to be plugged proactively and through resisting their attempts to exert influence over the policymakers. To minimize their control over the economy would require not loans at zero interest rate but resistance and reversal of policies that strengthen their hold over the economy.

Copyright Business Recorder, 2022