Is Rent-Seeking Entrenched?

The government intends to draft new laws to curb rent-seeking or the “Ali Baba” culture. Estimated losses from rent-seeking is around 1% of the country’s gross domestic product (GDP), or RM17.9bil of GDP (nominal GDP in 2022: RM1.791 trillion).

Rent-seeking practices have become entrenched in government processes such as procurement, licensing, permit and quota allocation, as well as the distribution of subsidies and grants. The AP holders are the best known rent-seekers. Why work? When others will work for your and give a percentage of their revenue.

Rent-seeking includes the mark-up of government projects, piracy, lobbying the government for subsidies or acting as a middle-man soliciting government’s contracts for some fees.

Source: https://corporatefinanceinstitute.com

There are three costs associated with the rent-seeking activities. First, direct costs such as consumers pay higher prices of goods and services due to market imperfection. Second, opportunity costs as real resources were not invested productively. And third, moral costs as people and businesses also join the fray of engaging in rent-seeking themselves.

Studies have shown that the rent-seeking activities have exerted a heavy economic and social toll on a country. Pervasive rent-seeking reduces economic efficiency through the misallocation of resources.

It does not add value as it distorts market competition that provides the products and services at reasonable and competitive price. It hinders the creation of wealth, reduces government revenue, increases income inequality, and potentially leads to decline in national output and productivity.

Ali Baba is a classic example of a bumiputra firm having won a government contract or obtained a licence for a contract, but it did not do the work or operate the business. Instead, it is sub-contracted to other firms at a price for easy monetary gains. This system has created a rent-seeking class among the politically-connected, plus an inefficient and uncompetitive economy.

Individuals and firms spend vast amounts of money attempting to lobby and convince bureaucrats and regulators to provide some forms of protection, concession, monopolistic structure or restrict free entry or competition so that some industries or individuals can realise economic rent.

Less government involvement and intervention, as well as less bureaucratic and regulatory procedures will reduce the opportunities for rent-seeking. If a reasonable reward and punishment mechanism is in place with third-party Oversight, then you may reduce this activity.

Many say public procurements must be by way of competitive tender. Even this, rent-seekers can manipulate. The key issue is integrity – and that too at the highest levels. Some previous PMs had no compunction to this malfeasance.

The enactment of the Government Procurement Act is a positive step to curb excesses. But in the end it (rent-seeking) is something society has to abhor. If you say “rasuah” is “rezeki Tuhan” and it is permitted then we have a long way to go.

Reference:

The economic and social bane of rent-seeking, Lee Heng Guie, The Star, 17 August 2023