Rent Seeking in China

Tak-Wing Ngo, Yongping Wu

• Publisher: Routledge
• Year: 2008
• ISBN:
  9781134034406
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

In China, rent seeking has been linked to the idea of the local developmental state in which rapid economic development is explained in terms of the promotion of village and township enterprises by local cadres who wants to maximize revenue. At the same time, the rent-seeking state is also seen as the root of corrupt practices and in the creation of a political market where state assets and authorities are diverted into private interests.

Despite the prevalence of rent seeking practices in present day China, no systematic study of the phenomenon across different regions and economic sectors has yet been undertaken and as such what accounts for the occurrence of the phenomenon, what range of activities are related to rent seeking practices and, more importantly, how rent seeking shapes political and economic development are barely understood. Rent Seeking in China seeks to address these questions using case studies from across economics sectors including primary industry, strategic industry, heavy industry, and light industry. It will be invaluable reading for students and scholars of Chinese politics, comparative politics and Chinese economic and business management.

1 The politics of rent production

Tak- Wing Ngo

Rent seeking is a common phenomenon in developing countries. It is no exception in China where rent seeking has become an almost institutionalized form of practice during the ongoing market reform. Economic players (including foreign investors) recognize that they have to compete not just in improving their market performance but also in obtaining policy preferences, securing bureaucratic support, and cultivating personal networks.

Existing studies of rent seeking have hitherto treated the phenomenon as pathological to economic development. Economists believe that bureaucratic intervention in market activities creates economic rents—often in the form of monopolistic profits—for a privileged few. They argue that competition for such economic rents generates social waste because resources that could otherwise be devoted to value-producing activities are engaged in competition for distributive results. Rent seeking is thus seen as creating inefficiency and hence is harmful to economic development. Most studies therefore seek to find ways of minimizing the extent (i.e., quantity) of rent seeking.

Our aim in this volume is not to recite this acclaimed wisdom. Instead, we seek to move beyond the normative concern about the economic inefficiency of rent seeking. We believe that the study of rent seeking is a good means by which to understand the political economy of market reform. The concept of rent seeking allows an incisive examination of the interplay between state power and market power. It offers a distinctive point of departure to study state-market relations. However, in order to boost its analytical power, the existing theory of rent seeking needs to be reconsidered. First and foremost, we have to move beyond the economistic concerns and look at the political processes associated with rent seeking: bureaucratic fiefdoms using policies as instruments of rent creation, political contentions between rent seekers, specific terms of exchange between state regulators and monopolistic players, and the broader historical and institutional context which shapes or constrains such terms of exchange. A systematic study of rent seeking can offer great insight into the nature of economic governance, the policy process, and state-market relations. This is what we aim to achieve in this volume.

In this chapter we outline an analytical model with which rent seeking can be systematically compared and studied. The schema departs from the existing inquiries in several regards. First, instead of focusing exclusively on the demand side of rent seeking, we shift the inquiry to a broader concern over rent production. By rent production we mean the whole sequence of practices from the creation, allocation, and redistribution to the pursuit of economic rents. Second, we move away from the singular concern over quantity—that is, the amount of economic rents and the extent of rent seeking—to the rich varieties of mechanisms relating to rent production. Third, in contrast to the Public Choice approach, we study rent-seeking activities from a historical-institutional perspective rather than from methodological individualism. Our goal is to map out the patterns of rent production across different industrial sectors and regions and to identify the institutional artifacts that give rise to such patterns. Fourth, in addition to examining the economic consequences of widespread rent seeking, we are equally concerned about the political implications of rent production. Specifically, we seek to investigate how rent production is intertwined with industrial policy making, coalitional politics, economic governance, and intrabureaucratic contentions.

The following discussion elaborates in detail such an analytical schema. In short, it argues for a theoretical reconsideration to study rent-seeking politics from a historical-institutional perspective. It then maps out the schematic sequence of rent production. It further proposes the need to chart out patterns of rent production and then to account for variations in such patterns. Finally, it probes into the implications for politico-economic governance.

A historical-institutional approach to rent seeking

It is worth recapitulating the current conception of rent seeking before we highlight its limitations. The concept owes much to the economic theory advanced by Buchanan, Tullock, Tollison, and others. They focus on the extra return above the market clearing price. Rent is the payment made to an owner of resources over and above that which those resources could command in alternative uses.¹ In other words, rent is a return in excess of opportunity cost. In the ideal market system of textbook economics, all economic rents will be eroded or dissipated through time. This is because above-cost payments to any resource owner will attract other profit seekers to engage in identical pursuits. The entry of more and more profit seekers will thus drive the rent down. Eventually, rents will disappear altogether. Critical to this process is the freedom of entry. If the entry of other profit seekers is blocked, such as in a cartel, monopoly, or government regulation, output price will not fall and hence no dissipation of rent can occur. Economists consider this kind of rents as “artificially” contrived. Such artificially contrived rents are subject to competition, or rent seeking. Put differently, the creation of rents by state intervention and the allocation of rents to political supporters invite other social players to engage in rent seeking. Many economists believe that rent seeking constitutes a kind of unproductive activity and is thus detrimental to economic growth.² At the same time, it has been widely acknowledged that rent seeking is commonplace among developing nations.³ The elimination of rents and rent seeking is thus seen as the institutional prerequisite for economic development.

Such a view has been rightly criticized by Khan, who points out that the existing rent-seeking literature has been focusing exclusively on the social costs used up in rent seeking.⁴ It misrepresents the rent-seeking problem by presenting only one side—the input side—of the process. He argues that different types of rents created in different contexts are of equal importance. According to him, some rents are inefficient and growth retarding, such as monopoly rent; others, such as natural resource rent and rent for learning, play an essential role in growth and development. The more important question, Khan argues, is whether the economic benefits produced by good rents can outweigh the rent-seeking costs or whether the costs of bad rents will add to the social wastes. In other words, it is not just the costs incurred by rent seeking that matters, the rent outcomes or outputs produced by rent seeking should enter the equation of cost-benefit calculation. Khan further argues that economic rents and rent-seeking activities have a universal existence. The relevant distinction is between rent-seeking systems which are developmental and those which are crippling.⁵

The two divergent views on the nature of rents lead directly to different approaches on the study of rent-seeking politics. From the outset, the political implication of rents and rent seeking on state-market relations is obvious. Conflicts over rent distribution occur when the state engages in market regulation, credit rationing, creation of tariffs, and allocation of raw materials. Political scientists have been looking at the phenomenon for some time. The dominant approach is a liberal model of rent seeking linked to an interest group theory of government, usually referred to as the Public Choice School.⁶ The theory takes a pluralist view of parliamentary politics where interest groups try to influence government for economic gains while politicians mediate the competition for rents in order to maximize votes. It has developed into game approaches where rational players such as the media, voters, bureaucrats, and political parties are assumed to play a part.⁷ Despite its emphasis on political exchange, the Public Choice theory of rent seeking rests upon the same premise of methodological individualism as neoclassical economics. The terms of exchange among enterprises, voters, bureaucrats, and politicians are seen to be founded on rational choice that conforms to the logic of microeconomics.

A different approach is put forward by Khan, who focuses on institutional analysis. In his words, the utilization of rents is closely related to a set of economic rights. Rent seeking is a political process because the creation and pursuit of rents require alteration in the structure of economic rights which in turn predicates upon legal, institutional, or policy changes. The question raised by Khan is thus about the political and institutional variables that determine the input costs and outputs of rent seeking. His main concern centers on the political conditions and institutional setups that will produce good rents so that rent seeking becomes growth enhancing.⁸

The insight offered by Khan takes a major step forward from the conventional analysis which sees rent seeking as nothing but a pathological activity. Nonetheless, Khan’s approach still suffers from a serious limitation. Even though it recognizes the political nature of rent seeking and advocates the need to analyze rent seeking as a process, the approach is still exclusively interested in the economic consequences of rent seeking. Compared to neoclassical economics which try to find ways of eliminating rents, Khan’s approach seeks to find the right political and institutional settings that can produce good rents. In essence, such an approach shares the same underlying assumption with the developmental state theory: economic growth as predicated upon getting the price wrong but the institutions right. Although advocates of the developmental state theory have seldom made reference to the rent-seeking literature, their core ideas can indeed be aptly captured by the latter’s conceptual lexicon. Specifically, the developmental state theory posits that the spectacular growth of some East Asian nations such as South Korea and Taiwan is the result of extensive market intervention by a development-oriented state. The central claim, as one advocate of the theory puts it, is “getting the price wrong” through state intervention.⁹ Put differently, state intervention creates rents by granting subsidies to targeted industries, extending preferential loans to individual businesses, creating monopolistic enterprises to pick and protect winners, or even engaging directly in production to develop new markets. These rents, according to the theory, are channeled into productive purposes rather than personal gains because of the presence of institutional safeguards such as state autonomy, technocratic insulation, social embeddedness, and collaborative government-business relations. In other words, given the “right” institutional setting, rents can be productive or even desirable.

Insightful as it is in emphasizing the institutional backdrop for the analysis of rent seeking, Khan’s approach represents another economistic appropriation of the political that strips political economy of its essence in power exchange. In reality, rent is embedded in the politics every bit as much as the economics of the political economy. It is accordingly a resource and instrument in the service of political ends (the pursuit of power, the rewarding of supporters, etc.) despite ostensible economic ends.¹⁰ Elsewhere we have criticized the economistic paradigm in such an approach to the study of the Asian political economy.¹¹ The same line of criticism can apply to this idea of good rents and growth-enhancing rent seeking.

We advocate here a historical-institutional approach to rent seeking which does not focus solely on the economic consequences but also on the political processes of rent creation, allocation, and seeking and their related political as well as economic consequences. We move away from methodological individualism and look at the historical legacies and political institutions which shape rent production. Instead of asking the question “What political institutions determine the creation of good or bad rents?” we ask “How does a certain set of political institutions shape a specific pattern of rent-creation and rent-seeking practices?” In the context of China, we are particularly interested to know how different patterns of rent production across various sectors and regions might help us to understand the working of political institutions. We believe that the analysis of rent production can offer a fruitful angle to unveil the political economy of China and other countries. This can be done by unlocking the sequence and patterns of rent production discussed in the following sections.

Rent seeking, corruption, and clientelism

Before we elaborate on the sequence of rent production, it is useful to clarify some common conceptual confusion over rent seeking, corruption, and clientelism. Although rent seeking and corruption are intimately related, they are not the same thing. They are highly intertwined because officials can utilize their power of rent creation as a means of bribe seeking. At the same time, economic actors frequently pay bribes to officials as a means of rent seeking. Despite their close relation, rent seeking and corruption belong to different realms of practices. Nonetheless, both practices share a common medium of exchange: clientelism.

Corruption is commonly understood as the use of public power for private gain. However, beyond this simple understanding a more precise defining of corruption is anything but straightforward. Generations of scholars have produced competing definitions of corruption, ranging from legalistic, normative, functional, to economistic understandings.¹² The problem is aggravated in the analysis of China, as Chinese law and official policy consider almost all forms of official malfeasance by state and Party cadres as corruption. These range from crimes with material returns such as embezzlement of public property, fraud, bribery, tax evasion, smuggling, profiteering, and rent seeking; to power abuses such as negligence, collusion, sectionalism, and nepotism; to improper behavior of officials such as womanizing, gambling, drinking, stock market speculation, extravagant living, and superstition. In response, some scholars have taken a broad definition of corruption.¹³ Others prefer a narrower definition confining to the usurpation of public authority for private gains as corruption proper, while discounting nonmaterial forms of official malfeasance such as power abuse and misconduct.¹⁴

Even among those who prefer the narrower definition, many regard rent seeking as a form of corruption. We argue here that maintaining a conceptual distinction between corruption and rent seeking is important. While the creation, allocation, and pursuit of economic rents are prone to corruption, these activities do not necessarily involve corruption in the form of usurpation of public authority for private gains. A good illustration is the price cartel formed by instant noodle manufacturers in China. The cartel was organized by the China arm of the International Ramen Manufacturers Association, IRMA. Members of IRMA China hold a 95 percent share of the instant noodle market in China. After several meetings, they reached an agreement to raise the price of instant noodles in June 2007, resulting in a nationwide price hike. The jacked-up price thus yielded extra profits to the cartel members in the form of rents. The price increase alarmed the China Consumers Association which filed a complaint to the National Development and Reform Commission. The Commission subsequently ruled that the price cartel contravened the Price Law.¹⁵ In this case, the practice was illegal as it hinged upon a conspiracy to manipulate the market price, which is punishable under Chinese law. However, no corrupt exchange was involved in the creation of rents by means of a price cartel. It is a clear example of illegal rent seeking without involving corruption.¹⁶

In the same vein, there is no shortage of corruption cases involving government-business collusion for private gains which at the same time link to rent seeking. The widely reported Yuanhua scandal is a good case in point. In the province of X...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• List of figures
• List of tables
• List of contributors
• Preface
• 1 The politics of rent production
• 2 Rent seeking, corruption, and clientelism
• 3 Transition from surplus seeking to rent seeking
• 4 The institutional context of rent seeking in economic transition
• 5 Local state takeover as multiple rent seeking in private business
• 6 Rents and rent seeking in the coal industry
• 7 Powering rent seeking in the electricity industry
• 8 Rent allocation and industrial policy efficacy in the steel industry
• 9 Rent production and industrial governance in the auto industry
• 10 Rent seeking and the development of the beer industry
• 11 Rents, mergers, and acquisitions in the automotive and beer industries
• 12 Rent seeking, corruption, and local finance in historical perspective
• 13 The Chinese mode of rent utilization in comparative perspective
• Bibliography