Chapter 6 Rent Seeking Behaviour, Contingent Rent and Competition
6.1 Introduction
So far we have argued about the kernels for industrialisation and some conditions accelerating industrialisation process. Then, we have found that government involvement is rationalised to coordinate problems for effective industrialisation. That is to say, some cases require the government to intervene. However, there are some strong objections, held by neoclassical school, against government activism. Thus, we need to discuss the methodological phase of governmental involvement.
The following section reviews main arguments against government intervention. The most intense objection to the government intervention is "rent seeking" theory, which bears inefficiency. 6.3 shows an alternative kind of rents which do not accompany with inefficiency, called as "contingent rents". Finally, in 6.4, we argue that the contingent rents follows not only non-inefficiency but also keen competitiveness. In fact, Japanese case provides a good example of this point.
Generally speaking, the reason why neoclassical school denies any protections or government intervention is that the arbitrary intervention is supposed to distort resource allocation and to bear inefficiency. "Rent seeking behaviour" means that other persons' behaviour is more expected than self-effort when others are capable of making more welfare than self-effort does. Therefore the attention is paid not to self-innovation but to influence to others. This applies to the protections to an industry or enterprises, i.e., enterprises tend to form strong dependency on the subsidies or special treatment, and result to focus on "political lobbying behaviour", though self-effort innovation is essential to industrialisation. It is obvious that the soft budget constraints or paternalism cause to weaken the enterprises' essential competitiveness, as Kornai (1970) explains. With regard to innovation, Lall (1993b: 732) criticises that any protection will reduce the incentive for TC development: " Protection takes away the incentive to invest in TC development. It can therefore be self-negating unless safeguarding measures are undertaken." Thus, any profit prospect which has higher anticipation than that from competition market, is supposed to reduce the incentive of enterprises for the competition, then, self-effort to innovation cannot be activated. Based on such idea, currently, the governmental support is supposed to create inefficient rents and futile "rent seeking behaviour".
However, the governmental rents in HPAEs with high ERPs in wide range, have not caused detrimental rent seeking behaviour as seriously as India or South America does. Especially, with respect to direct subsidy, Korea has provided good counterevidence: Korean automobile industry, machinery industries have extremely high competitiveness even though they are enjoying large amount of the direct subsidies for export. Accordingly, we have to find something which distinguish such "inefficient rents" and "non-inefficient rents", specifying a condition to successful rents.
Here is a significant description about the essence of "inefficiency by government intervention" by Porter (1990: 128): " Market pressures and resulting innovations can overcome factor costs, however, so that under valuation can slow the upgrading of competitive advantage and direct firms to less sustainable, price sensitive market segments. The result is a long-term loss of competitive advantage. Government "help" that removes the pressure on firms to improve and upgrade is counterproductive." Thus, the reason of inefficiency due to government intervention can be found in that it reduce the competition pressure.
There is, however, no evidence that any government rents cause necessarily enterprises to pay attention other than the facing market. If an enterprise looks at special treatment by government than the competitive market, there should be higher profit prospect, which guarantees to help individual enterprise directly without self-effort, than the certainty from the market. In other words, only profit prospects which are certain enough to release from the bankruptcy risk can reduce both the sense of crisis and the incentive for competition. Consequently, only if the rents go to individual to relief budget constraints, the abuse comes from the reduction of competition pressure, while if not, any abuse will not come. That is, as long as the competition pressure is kept in the same level, we cannot say the rents are causing abuse.
Then, the next question to note is what kind of rents are not inefficient arise. Aoki, Murdock and Okuno-Fujiwara (1996: 14) offers a serviceable definition: " Suppose that government policies create rent opportunities in the private sector, opportunities to gain returns in excess of those generated by a competitive process, instead of by a direct transfer of wealth. Thus, if policy-induced rents are provided on the condition of fulfilment of an objective criterion, they may induce private agents to supply more goods that are under supplied in the competitive process. Using the phrase "performance indexed reward," the East Asian Miracle (EAM) suggests an idea similar to "contingent rents". EAM notes that a wide range of government assistance in the form of subsidies, access to rationed credits and foreign exchange, tax exemptions, etc., was provided to businesses in East Asian the basis of export "contests". EAM considers such contests to be effective in limiting unproductive rent-seeking behaviour because of the transparency of the rule. Rewarding the agent with better performance will preserve competition among the recipients." In short, if the rents are distributed not to individuals but to the whole industry or plural enterprises under the manifest rule, a competition among them can be expected to emerge, and the incentive is maintained by the competition pressure.
It is worthwhile to notice that, in some cases, enterprises may have stronger incentive on the contrary. If the indicated rents (awards) seem to be more profitable than that from native market competition, they are activated arbitrarily. There is no evidence that the profit from market competition is superior to governmental rents always. In the sense, rents can produce or activate the competition. Thus, if " the government has the ability to create as well as allocate rents, through taxation and subsidies, franchising, preferential loans, and lend grants, especially in the early stage of economic development, when markets are small and undeveloped (and hence noncompetitive)" (Lau, 1996: 82), government can create the competition itself artificially, of course.
The other resistant ground against government intervention is the available information issue. In order to determine a coordination problem solution policy without conflict between market competition, the enough information related to the market conditions and various private behaviour, is required, however, it seems unable to obtain all of information for the government. If the government holds an intervention policy with insufficient information, a government failure tends to occur with strong possibility. Accordingly, the policy maker needs to possess sufficient information availability in accumulation, analysis and execution, and it concludes that LDCs with low government ability is not anticipated to carry out intervention.
Thus, the government needs the enough information, while the government can create competitions. More precisely, the government may utilise the rents in order to spread new technologies or develop specific technologies, or to improve industrial structure arbitrary, at the same time, considerably high government ability is required. However, it does not mean absolute high government ability, because the difficulty level of coordination problem is not the same for each. In other words, the government ability is required to be superior to the concerned problem relatively. It is true that too complex coordination problem needs high government ability, but simple coordination problem needs considerably low ability. Kim and Ma (1996: 102-103) argue that government failure is not absolute. They also note that there are some conditions to avoid government failure: "Rent seeking can be controlled when a government intervention is based on well-specified and effectively enforced rules. Government coordination failures can be minimised when the number of players involved is small, the homogeneity of products is high, and channels that permit information exchange between the government and the private sector function effectively." (Ibid: 102-103) Thus, if there are relatively small number of players, relatively high homogeneity of products and relatively functional information network against the concerned problem, the government rents can avoid failures. In turn, the minimum necessary level of information depends on the concerned coordination problem, and it does not require absolutely defined level. Therefore, if the facing problem is clear and very simple, and if it needs small information, the government activism can cause desirable result without inefficiency even in LDC. The argument that "Focusing limited state capability on the basics is a badly needed first step in wide range of countries __ especially in Africa, the CIS countries, and parts of Latin America, the Middle East, and South Asia" (The World development Report, 1997: 158) overlooks the point that the individual characters of each coordination problems are different in complexity and width. Each coordination problem requires sufficient state capability not in absolute level but relative level.
In conclusion, imperfect information captures any government policy, but it does not lead government failure directly. The most significant point of the rent issue is to keep competitiveness. And high state capability related to the facing problem, is required. At last, those successful rents may create/activate competition among enterprises.
There are many arguments both for and against the Japanese industrial policy. EAM treats Japanese government activism as exceptional, whereas some others deal it as representative of government intervention. The argument by Okazaki and Ishi (1996) and Kim and Ma (1996) well explain the secret of Japanese success affirmatively.
In the first place, Okazaki and Ishi (1996: 110) enumerate some specific reasons why Japanese government could avoid government failures as: "firstly, there has been the mechanisms that reflect various market information to the policy. The deliberate councils in which many related industry representatives participate, the industrial network group, and the respect to the financial banks' opinion have functioned. Second, the authorities have paid attentions not to cause rent seeking behaviour. The objective clear yardstick and the councils' assessment of the policy supported the effort. Thirdly, the clear and strict rule for the rent promotes the competition among enterprises. Fourth, export push has been the main purpose and it has been recognised commonly. Then, enterprises have received the potential pressure from the world market as well as domestic rivalry."
In addition, Kim and Ma (1996: 121) take notice at the dynamic aspect of contingent entry, in the Japanese petrochemical industry: " The staggered approach announced by MITI in the early 1950s clearly conveyed the message that a few years after the first entry, more firms would be allowed to enter the market. With the government’s commitment to such a strategy, firms that were denied access to the market in the first round could make long-term plans for development to gain access to the government-promoted, market in the future. The potential threat from future entrants, which the government promised, in turn forced the first incumbent to innovate in order to secure its leading position in the market."
Thus, the Japanese industrial policy has implied not only effective competition creation but also that potential entrants received profit prospect by the clear yardstick and the staggered approach, in the long-term, because the latter entrants could enjoy forerunners' experience and "the advantage of backwardness". The yardstick held by government showed concrete possibility to reduce uncertainty and increase incentive as well. Therefore the potential entrants remained at favourable circumstance. On the other hand, forerunner enterprises were given the pressure from the potential enterprises. At the same time, forerunner beginning export was a new entrant to the world market to challenge advanced foreign TNCs. Thus, the combination of export push strategy and staggered approach has given a chained pressure system and those enterprises received both from fore and rear.
