Rent Seeking and Development

The Political Economy of Industrialization in Vietnam.

Christine Ngoc Ngo

• Publisher: Routledge
• Year: 2020
• Print ISBN: 9781138100763
• eBook ISBN: 9781317328216
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

Rent seeking continues to be a topic of much discussion and debate within the political economy. This new study challenges previous assumptions and sets out a new analysis of the dynamics of rent and rent seeking in development, using Vietnam as a case study.

This book provides an alternative approach to the study of economic development and illuminates new perspectives in a contemporary context. It argues that not only has there been an incomplete understanding of Vietnam's industrial development over the last three decades, but that neoclassical economics do not adequately address many of the issues endangering Vietnam's development.

A significant observation of the Vietnamese experience is the analytical view that rents can be developmental and growth enhancing if the configuration of rent management incentivizes industrial upgrade and conditions firm performance. Underlining the need to reexamine how economic actors and the state collaborate through formal and informal institutions, this study fills a gap in the scholarship of the political economy of rent and rent seeking and how rents might be used for developmental purposes.

1
Rent management as development

1.1 Economic development in transitional economies

Economic development is a process of change that enables a poor country to achieve progress for its people and society at large. It also allows individuals and communities to strive for better livelihoods by improving economic and social infrastructures, income, opportunities, and aspirations. However, development is not a linear process of a few economic factors moving from one development level to the next. Rather, it is a series of dynamic, evolutionary factors and forces that move in unsynchronized and unpredictable directions. Much of the transformation involves individuals and firms learning not only to create innovative and sought-after products but to make risky investment decisions within a short time horizon. There is also the crucial role of the state in coordinating investments, infrastructure planning, education, training, technology adoption, and backward and forward linkages among firms, industries, markets, and research institutions. If history is any guide, it is an extremely challenging process. Few countries in the last century successfully became newly advanced and industrialized economies. These include Japan, the East Asian Tigers, and to some extent, China.

The objective of this book is to highlight the dynamic transformation in economic development and to understand it from a developing country’s perspective – in this case, Vietnam. Understanding dynamic transformation reveals the strengths and weaknesses embedded in a developing economy and how they influence the actions of the state, firms, entrepreneurs, and the labor force. This objective is achieved through careful study of country history and context, and the actions of economic agents, while incorporating economic theories and practices. History reveals not only the origin of institutions but also the existing economic, social, and political arrangements. Meanwhile, context provides implicit knowledge about social norms, customs, and motivations. These contextual features help explain the behavior of individuals and groups, given the constraints in resources and weak institutions. Finally, economic theories provide cursory guidance and intuition to spot-check issues, analyze processes of change, and identify policy solutions.

Development is an ever-changing process, as is the context in which poor countries often find themselves in the course of history and global relations. In recent decades, developing countries have encountered new sets of opportunities and challenges against the backdrop of hyper-globalization; the rise of China; changes in geopolitics; and unprecedented rates of technological change, climate change, and rising inequality within and across nation states. Opportunities emerge from rising global wealth and market demand, innovative production techniques that boost productivity and outputs, and hungry capitals looking to make profits across the world. Nevertheless, the new set of challenges is encompassing and unprecedented, so much so that development models and examples offered by Western countries and East Asian economies are no longer sufficient. For example, the world has never seen an economy rise at the speed and size of China. Presumed trade-offs among growth, environment, and inequality are no longer tolerable for the earth and for poor workers around the world. Hyper-globalization and its innovative institutions have not only reduced the policy space for developing countries but also created a backlash from around the world. These events have led to a great deal of turbulence in international cooperation that, in the past, was crucial to reducing poverty, elevating development, and promoting progress in poor countries.

Economic development in the twenty-first century is a quest with narrowing global support, time, trust, and policy space (United Nations Conference on Trade and Development, 2018). The first two decades of the twenty-first century squarely placed countries and people in a new age of hostile politics and conflicts across the social classes; growing, powerful multinationals; and diminishing liberal democracy. Developing countries, therefore, must manage their own processes of development and navigate the winds of change in global markets and affairs. It is within this perspective that this book aims to contribute. The objective is to provide an alternative approach to the study of development and policymaking and to illuminate new understandings in a contemporary context. The “alternative” theoretical and analytical approaches adopted in this book are uncommon within mainstream economic literature, with special attention to recent contributions in the field of the political economy of development.¹ This strand of literature offers much-needed theories, perspectives, and research methods to analyze and understand economic transformation without the unrealistic assumptions of competitive markets, perfect information, costless technological change, savings-determined investment, and constant income distribution found in mainstream economics. I will begin by locating the political economy approach in the vast body of economic development literature, motivations for this research, and the research questions and methodology used.

1.2 The political economy of development

The political economy literature focusing on economic development has been instrumental in explaining why some countries are more successful than others in achieving development and growth (Amsden, 1989; Chang, 2000; Cimoli, Dosi, & Stiglitz, 2009; Lall, 1992; North, 1990; Rodrik, 2004; Stiglitz, 2013). Scholars and field practitioners have identified several important factors that enhance or impede development. In addition, analyses uncovering economic progress in Japan, China, the newly industrialized East Asian countries, India, and Africa deliver significant insight into the mechanisms that contribute to successful or failed development efforts (Amsden, 1989; Amsden, 2009; Bard-han, 1999; Booth & Golooba-Mutebi, 2012; Fine, 1997; Fung, 1989; Khan & Blankenburg, 2009; Lall, 2004; Wade, 1990; Whitfield, Therkildsen, Buur, & Kjaer, 2015).

The analytical approaches used to analyze development processes in these studies come from a variety of schools of thought in development economics, development studies, and area studies. For example, neoclassical economists attribute development success to improvements in rules of law that allow for market freedom, trade liberalization, foreign investment, and entrepreneurship in poor countries (Krueger, 2012; Sachs & Pistor, 1997; World Bank, 1991, 2008). Development scholars highlight the role of the government in those countries and how “getting relative prices wrong” could provide incentives and resources for firm performance that lead to industrialization and development (Amsden, 1989, 2001; Chang, 1999; Chang, Cheema, & Mises, 2002; Wade, 1990). Corruption literature provides additional insights into how cronyism and corruption can be productive in the context of development because they provide stability to the political economy, motivation for state agencies to enforce certain growth-enhancing policies, and the possibility for firms to focus resources on productivity growth (Acemoglu & Verdier, 2000; Gray, 2015; Hanousek & Kochanova, 2016; Méndez & Sepúlveda, 2006). Finally, the literature on rent, rent seeking, and rent management analyzes economic development from the perspective of resource allocation; structures of incentive and conditionality; and political settlement within specific political, institutional, and industry dynamics (Abegaz, 2013; Booth & Golooba-Mutebi, 2012; Khan & Jomo, 2000b; Ngo, 2016; Whit-field et al., 2015). These different strands of literature are complementary, in that they highlight interplays between the crucial roles of the state, functioning of the market, technological change, and firm incentives that can explain economic growth in developing countries since the second half of the twentieth century.

This book employs important theoretical contributions in the political economy of development using the theory of rent and rent seeking to analyze the dynamic process of economic transformation. Rent is defined as income over and above the amount that would be received under a competitive market system. Rent seeking is the expenditure of resources by individuals, firms, or policymakers to create rent or to maintain and transfer existing rent (Khan, 2000).² Although the concept of rent was first discussed by classical economists such as David Ricardo and Alfred Marshall, analyses of rent and rent seeking were only carefully developed in the public choice and neoliberal literature of the late 1960s to reinforce the support of free-market driven economies and claims against state intervention (Buchanan, Tollison, & Tullock, 1980; Krueger, 1974; Tullock, 1967). The public choice and neoliberal approaches have since been questioned and broadened by institutional and political economists. These economists point out inconsistencies in assuming that rent and rent seeking could be removed without political and economic costs. In addition, the institutions used to remove rent and rent seeking effectively create alternative rents and rights. Therefore, rents cannot be eliminated entirely (Khan & Jomo, 2000b; Medema, 1991; Samuels & Mercuro, 1984). From this point of view, political and institutional economists suggest to first analyze the origins and types of rent being created, the individuals and groups that benefit from rent, and the economic outcomes produced by the use of such rent. Then, policy solutions with considerations of rent outcomes can be devised to promote development (Gray & Whitfield, 2014; Khan & Jomo, 2000b; Ngo, 2016; Whitfield et al., 2015).

From this perspective, political and institutional economists broaden the conceptual framework of rent and rent seeking used by the public choice and neoliberal literature, allowing it to become a constructive and insightful analytical tool in the field of the political economy of development. This broadened conceptual framework addresses the limitations of the mainstream’s approach to economic development. For instance, the presumptions of perfect market competition and rational economic men are ill suited for understanding development in poor countries where power, norms, and market failures are omnipresent. More importantly, by enriching the conceptual framework of rent and rent seeking, this strand of literature helps explain the dynamics, complexity, and nuances of economic transformation.

1.3 Research motivation and question

Early literature on rent creation and rent seeking tends to narrowly depict these phenomena as inherently inefficient and growth-reducing, and rarely attends to how they may have contributed to positive developmental outcomes (Buchanan et al., 1980; Krueger, 1998; Posner, 1975; Tullock, 1967). More problematic is the claim, widely spread by donor agencies, that development failures in poor countries are mostly due to the pervasive damage of rents and rent seeking (Coolidge & Rose-Ackerman, 1999; Mauro, 1997). Given this perspective, donor conditionalities in many poor countries are often meant to curb rent creation and rent seeking on the grounds that they necessarily undermine economic development. Vietnam is one country where this argument has been advanced. Experts on Vietnam frequently attribute the country’s development challenges to rent seeking. The warning from the World Bank 2003 Development Report is representative:

[Vietnam] may fail to remove the obstacles in its reform path, let the vested interests capture government transfers to offset their inefficiencies, and see an unhealthy relationship develop between enterprises and government officials. A weak macroeconomic situation, slower growth, increased inequality and generalized corruption could be the outcomes.

(World Bank, 2003, p. 4)

As mentioned, an emerging body of political economy literature challenges this narrow perspective on rent and rent seeking. Research by institutional economists such as Khan and Jomo (2000b); North, Wallis, Webb, and Weingast (2007); Whitfield et al. (2015); and Gray (2018) provide evidence that certain types of rent can be value enhancing and that rent seeking can lead to development. In the words of Khan and Jomo (2000a): “In a world where...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication Page
• Contents
• List of figures
• List of tables
• About the author
• Foreword
• Preface
• Acknowledgments
• 1 Rent management as development
• 2 Rethinking rent seeking for development and technological change
• 3 Developmental rent-management analysis: learning, upgrading, and innovation
• 4 The telecommunications industry: a leap of the giants
• 5 The textile and garment industry in the value chain and industrial transformation
• 6 The motorcycle industry: the triangular rent-seeking relationship among Vietnam, Japan, and China
• 7 Industrial transformation and rent seeking: lessons for development
• Index