Reducing Rent Seeking

TRADE AND industrial POLICY REFORMbyDani RodrickPresented By:Muhammad Gulfam ArshedZulfiqar AhmedMalaika AbbasDani Rodrik is one of the most important political economists of our time. Dani Rodrik Born August 14, 1957 in Istanbul, Turkey.

2EDUCATIONPh.D. in Economics, June 1985 in (Princeton University)

Master in Public Affairs (M.P.A.), June 1981 with distinction Woodrow Wilson School of Public and International Affairs in (Princeton University) PRESENT POSITION Rafiq Hariri Professor of International Political Economy John F. Kennedy School of Government Harvard University. PREVIOUS POSITIONSProfessor of Economics and International Affairs in Columbia University (1992-1996).Assistant (1985-89) and Associate (1989-92) Professor of Public Policy in John F. Kennedy School of Government Harvard University .

Assistant Economic Affairs Officer United Nations Conference on Trade and Development Geneva, Switzerland (1980 and 1981-82).Books And Articles PublicationsOne Economics, Many Recipes.

Has Globalization Gone Too Far?

Danis newest book, The Globalization Paradox.As well he is the author of a large number of research articles.Introduction Two major economic events happened in the 1980s.

First, developing countries especially Latin America and Africa became overwhelmed in debt and macroeconomic crises. Because of this, this decade called the lost decade of development.Second is relating to policies.The inward oriented and import substituting policies were criticized from policy makers in developing countries.Anti export, anti private, public enterprise, industrial promotion and trade protection were condemned.Policies regarding privatization, industrial de-regulation and free trade were implemented.In this paper, Author has discussed the consequences of policy reforms with equal measures of theory and evidence.He focused on trade and industrial policies, macroeconomic stabilization issues and microeconomic reforms.Policy reform, Structural Adjustment and the World BankIn 1980s, the tern structural adjustment became virtually another name for policy reforms.All most all major policy reforms during this time was funded by structural adjustment Loans (SALs) from the World Bank.As well as IMF supported medium term assistance.Structural adjustment = trsde liberalization and outward orientation Bretton wood and donor country leads reformist agenda.SAL,s leads to outward oriented economy.In the context of 1980, some World Bank officials did work about this decade.Policies were not stable in developing countries. Than World Bank took initiative.SAL,s was appeared due to payment crises. It correct the micro and debt crises.According to Ernest Stern, a vice president of the World Bank who was closely involved in the development of SALs, interest in such lending arose from the frustration felt in the Bank in the aftermath of the second oil shook regarding the lack of real involvement in country policies, despite substantial commitment of resources in the form of project assistance.Origin of SALs lay in the external payments crisis brought on by the two rounds of oil shocks in the 1970s.Then Bank's attention soon turned to correcting microeconomic distortions. Indeed, it became common to view the subsequent debt crisis of 1982 as "one of the symptoms of these distortions.The goals set forth for SALs, therefore, covered both macroeconomic stabilization and microeconomic reforms.Two types of policy response:The first was stabilization, or managed reductions in expenditures to bring about an orderly adjustment of domestic demand to the reduced level of external resources available to the country.The second was structural adjustment, or changes in relative prices and institutions designed to make the economy more efficient, more flexible, and better able to use resources and so to engineer sustainable long-term growth. Streeten define the structural adjustment as In this very general sense, development is synonymous with structural adjustment and a paper on structural adjustment would he a paper on development.What is to be reformed?There are countless policies that came under attack by reformers.In trade policy, the reforms centered on quantitative restrictions like licensing, high tariff rates, export taxes, and heavy bureaucratic requirements and paperwork.On the other hand, industrial policy emphasized inefficient and loss-making public enterprises, entry and exit restrictions on private enterprise, price controls, discretionary tax and subsidy policies, and soft-budget constraints.Krueger, Schtff and Valdes (1991) have completed a multi-volume study on agricultural pricing policy that promises to do for agriculture what this earlier work has done for trade policy in industry.

These authors quantify the effects of policy interventions on agriculture, taking into account both direct effects and indirect effetcs.

Direct effects leads to sector-specific interventions.

Indirect effects those arising from trade restrictions on manufactures and induced changes in the equilibrium exchange rate.Why reform? The rationales for policy reformThere are four basic arguments in favor of market-oriented policy reform: (i) economic liberalization reduces static inefficiencies arising from resource misallocation and waste(ii) economic liberalization enhances learning, technological change, and economic growth(iii) outward-oriented economies are better able to cope with adverse external shocks(iv) market-based economic systems are less prone to wasteful rent-seeking activitiesWhy reform? The rationales for policy reform.................(iii) outward-oriented economies are better able to cope with adverse external shocks.

(iv) market-based economic systems are less prone to wasteful rent-seeking activities.1.Static effects: resource misallocationEconomic liberalization reduces static inefficiencies arising from resource misallocation and waste.

Import-substitution policies, covering high levels of trade protection and industrial regulation had encouraged the development of high-cost industries that did little to increase productivity.1.Static effects: resource misallocation......The resulting pattern of specialization shifted away from comparative advantage.

It yielded anti-export, anti-agriculture, anti-labor, and anti-newcomers effects for resource allocation.2.Dynamic affects: Technical change, learning, and growthEconomic liberalization enhances learning, technological change, and economic growth.Domestic and foreign competition provides incentives to keep up with modern technology to improve operations and market position.This view provides an explanation for the East Asian success and a prospective argument for the removal of distortions in other developing countries.2.1Firm level case studies of technological changeKatz (1987), Lalt (1987), Pack (1987), Levy (1991)and Pack (1992) show that there is a considerable amount of technological tinkering that goes on even when firms are cut off from foreign markets.

They do not lead to any easy generalizations regarding the extent to which trade regimes affect the pace of learning.2.2Cross industry studies of technical efficiency and productivity changeThere exist a number of studies that correlate aspects of policy regimes with measured changes in total factor productivity (TFP) at the industry level. The most notable of these are Krueger and Tuncer (1982a), Ntshimizu and Robinson (1984), Nishimizu and Page (1991).There have not been many studies that have attempted to test the infant-industry hypothesis directly. A well-known paper by Krueger and Tuncer (1 982b) comperes sectoral TFP growth rates in croas-section of Turkish industries, and reports that there was no systematic tendency for more protected industries to have had higher TFP growth than less protected industries.Strictly speaking, the authors' method does not constitute an appropriate test of the Infant-industry argument. Such a test would require e counterfactual regarding the TFP path that the protected industries would have followed in the absence of protection; the implicit assumption that the less protected industries provide the appropriate counterfactual is not compelling.Finally, a recent group of papers has been devoted specifically to the experiences of countries undergoing structural adjustment programs, and has paid close attention to econometric and conceptual issues. These papers will be discussed when we turn to the results of recent policy reforms.2.3Cross country studies of economic growthA large number of cross-country studies have looked at the relationship between economic growth and some measure of trade policy and/or price distortions, using various controls on the right-hand aide of the regression. These studies generally conclude that openness has been conducive to higher growth.The immediate problem in such regressions is corning up with an appropriate indicator of trade parley that would rank countries consistently among each other from least open to most open. Many candidate indicators exist, including trade shares, tariff and non-tariff measures, and residuals from factor-endowments models of trade patterns2.4Summary on empirical studies on dynamic costs at price distortionsA number of problems have plagued the empirical studies surveyed here. We summarize the more important here:(i) The trade-regime indicator used is typically measured very badly, and is often an endogenous variable itself.(ii) The direction of causality is not always clear, even when a policy variable is used as the trade indicator: governments may choose to relax trade restrictions when economic performance is good.2.4Summary on empirical studies on dynamic costs at price distortions(iii) Openness in the sense of lack of trade restrictions is often confused with macroeconomic aspects of the policy regime, notably the exchange-rate stance.

(iv) The causal mechanisms that link openness to beneficial dynamic effects are rarely laid out carefully and subjected to test themselves; this makes it very difficult for policy conclusions to be drawn.3.Response to external shocksOutward-oriented economies are better able to cope with adverse external shocks.Balassa (1981) analyzed the comparative experiences of countries during the first oil shock and found that export-promoting countries were able to increase their world market shares, which in turn affected their economic growth positively.3.Response to external shocks.........He later confirmed these findings with a larger sample of developing countries.

Sach (1985) gave a similar conclusion using East Asian and Latin American experiences.

Their works do not suggest that outward oriented countries are resistant to shocks. Rather, they propose that such countries have an easier time getting out of crisis.4.Institutional effects: reducing rent seekingMarket-based economic systems are less prone to wasteful rent-seeking activities.The institutional setting under which import-substitution policies have typically operated has given rise to a wide variety of incentive distortions and resource misallocations. 4.Institutional effects: reducing rent seekingIn contrast, Bhagwati and Srinivasan (1980) have noted that tariff revenue can be sought by rent-seekers as the anonymity of revenues that accumulate to the general budget shields them from the rent-seeking.Similarly, a uniform tax system may be more resistant to lobbying than one with a highly differentiated structure.Reducing Rent SeekingIt is the last argument in the support of policy reforms.

What is Rent Seeking.Organization or an individual uses their resources to obtain economic gain from others without reciprocating any benefits back to society through wealth creation.What Dani Rodik says about rent seeking ?Distortions and resource misallocations go under the name of rent seeking.The resource costs of prevailing distortions are increased many times in the presence of following activities.Lobbyists in the pursuit of licenses and incentive to be obtained from government officials.Individual and groups use political power to obtain particularistic benefits for themselves. Example of rent seeking took over;Rent seekers started to run after export subsidies instead of import licenses.This types of policies are more conducive to rent seeking than others.Tariff revenue can be sought by rent seekers just as quota premia.