Estimated losses from rent-seeking reached around 1% of the country’s gross domestic product (GDP), equivalent to RM17.9bil of GDP (nominal GDP in 2022: RM1.791 trillion). — Reuters
RENT-SEEKING has been around for a very long time. Breaking it is not going to be easy unless the government has a strong political will to work out effective regulations to stem this unhealthy and unproductive behaviour.
It is encouraging to note that the government will proceed with drafting new laws to curb the rent-seeking or “Ali Baba” culture, according to Prime Minister Datuk Seri Anwar Ibrahim.
This was decided at the July 10 meeting of the National Economic Action Council which recognised that rent-seeking has a negative impact on the economy.
Estimated losses from rent-seeking reached around 1% of the country’s gross domestic product (GDP), equivalent to 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.
Rent-seeking is an act where people and businesses gain profits and add wealth by manipulating the social and political environment without doing any real work as well as any contribution of productivity.
It encourages unproductive use of real resources in seeking incontestable rents.
Rent-seeking may include 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.
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 investing productively and third, moral costs as people and businesses also joined 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 the 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 was 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, monopolistic structure or restrict free entry or competition so that some industries or individuals can realise economic rent.
Some common sources of public policies and market regulations as well as interventions that render for rent-seeking behavioural activities are:
> Government’s industrial policies, incentives, and subsidies for certain sectors and industries that are inappropriately targeted, leading to unhealthy practices.
> Trade and quantitative restrictions such as quota, licensing, approved permits also induced rent-seeking. Firms will be lobbying intensively to influential bureaucrats and politicians to keep protecting them against competition, maintaining their monopolistic and oligopolistic market structure, and
> Supply and price controls to keep prices below its market level for social and economic considerations, mainly to keep prices stable and ease the cost of living pressure.
The government said that it has made significant progress in formulating laws and policies to deter “Ali Baba” behaviour. The Economy Ministry and the Attorney General’s Chambers is studying several components to draft a specific law to curb the rent-seeking culture in the country’s business and economic structure and present proposals to the Cabinet.
We believe that lower government involvement and intervention, as well as bureaucratic and regulatory procedures (including public policies aimed at liberalisation, deregulation, and privatisation), will reduce the opportunities for rent-seeking.
We need a holistic approach to prevent and combat rent-seeking activities.
Having multiple oversight institutions will make it very difficult for rent-seeking and corruption activities to grow.
They include institutionalising a mechanism to govern rent-seeking as well as contain corruption to deter public officials and politicians as well as private sector from soliciting rent-seeking business, ensuring transparency of public information and closing loopholes on government projects.Reward and punishment
Put in place a reasonable reward and punishment mechanism to suppress rent-seeking (both takers and givers) in the evaluation, appraisal and payment of the public-private partnership (PPP) projects.
Among the conditions set are the sum of the reward and punishment of each party is more significant than its speculative income, and the amount of performance fee withheld for the private investor is greater than the difference between its savings in project operating costs and speculative costs.
Public procurements must be put out to competitive tender.
In the implementation stage, ensuring transparency to create a barrier for rent-seeking contractors by encapsulating a fair and accountable disbursement process.
During the implementation phase, the agencies responsible for the project must follow quantitative and qualitative assessment methodologies to track the contractors’ performance to make prompt payment to them upon completion of the work schedule and reprimanded for below par performance.
Transparency of public information about government projects and tender process for contracts is crucial.
Firms must be fully informed about government contracting projects and how to participate in them. The tendering process should adopt the key values of fairness, clarity, simplicity and accountability.
All tenderers must receive the same information and most importantly, the government has to close loopholes for special interest groups. E-procurement (e-Perolehan) provides a framework of streamlining the overall tendering process; enhancing the transparency of tendering process as well as reducing unnecessary administration.
Positive step
The eventual enactment of the Government Procurement Act is a positive step in the right direction to curb excesses such as possible corruption, rent-seeking activities and patronage when bidding for the government’s contracts and projects. These include a mandatory requirement to publish procurement plan, publish more detailed information on awarded contracts, and allowing contractors to review the results for transparency.
Lee Heng Guie is Socio-Economic Research Centre executive director. The views expressed here are the writer’s own.
