More Rents, Less Growth
Sep30
Money & Macro

More Rents, Less Growth

The abysmal growth record of Russia after the fall of Communism is supposed to cast a pall over market-led reforms. What’s in the way? Austerity and neoliberalism or something, if you go by the word on the street. The New York Times in fact answered the question brilliantly just the other day, though it did not cast it as such an answer.

Mr. Putin came to power vowing to eliminate “as a class” the oligarchs who had amassed fortunes — and, to the new president’s mind, a dangerous quotient of political sway — under his predecessor, Boris N. Yeltsin, in the post-Communist chaos of the 1990s. Instead, a new class of tycoons have emerged, men of humble Soviet origins who owe their vast wealth to Mr. Putin, and offer unquestioning political fealty to him in return.

In other words, Russia has run afoul in a big way of the most important maxim in development economics:1 More Rents Less Growth. This is the takeaway of the various curses in the literature. The mechanism is simple enough: rent-seeking and productive activities compete for resources. The more are devoted to the former, the fewer are devoted to the latter. And only the latter, it turns out, is positive-sum.

To be fair, translating this maxim into concrete policy advice can be a very intricate business. Treating a government as a pure choosing subject leads to some very impertinent recommendations. The libertarian whose policy advice is “just stop regulating!” is no more helpful than the economist who recommends the implementation of an optimal tax, or the progressive who can’t imagine the regulatory apparatus he advocates will ever be used for anything he disapproves of. Thus we are left to deal with the uncomfortable result that credible de facto property rights work better than unbelievable formal property rights. And as both Russia and Argentina have shown, even something as benign as “privatization” can turn into quite the bonanza of rents. Overcoming the law of conservation of rents can require very creative public policy.

But it’s easy enough to see what won’t work. When Joe Stiglitz somehow takes the legacy of the Scottish Enlightenment to be free education and calls for “industrial policies [to] help shape the economy, help move it towards a learning society,” the first reaction should not be, “wouldn’t that be nice?”, but “look at all the new rents that would create!”

Educational bureaucracies on the scale required to fund gratis government education, completely aside from their usefulness as a tool of social control (especially in the hands of third-world dictators to whom we’re sending aid for this purpose), are a time-tested way of bestowing political patronage. In Pakistan not just bureaucratic positions but teaching jobs are dispensed this way (Easterly 2001, p. 83). Even in developed countries where despite this children still get something resembling an education, schools are nevertheless fertile breeding ground for special interests eager to extract what rents they can.

Who can be surprised then when a developing country strangles capital accumulation to fund an oversized educational bureaucracy and wonders why its economy isn’t growing?

Footnotes

  1. And even, to a lesser extent, in industrial organization economics.

Tags

Development, Education, Institutions, Russia, Joseph Stiglitz, William Easterly

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Hi, I'm C. Harwick, an economics PhD candidate in Virginia with an interest in monetary theory, institutional evolution, and folk music.

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