1970s checkpoints for rice
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There are two kinds of airports in the world: The first one is where you don’t need to have pre-arranged procedures about “what to do and how to do that” after you get down from the plane. For instance when you need to continue your journey onward from the airport, whatever the mode of transportation – taxi or bus or train -, it is readily available there at the airport premises without any hustle and bustle. You have a system with clear directions and instructions as well as standard logistics to facilitate your journey; you can quietly walk through exit gates pushing your luggage trolley and following the sign boards.
In other kinds of airports, you get confused on your arrival particularly about how to proceed to your eventual destination. There are no taxi stations or bus stations or train stations, adjoining the airport. Even if they are available somewhere, you hardly get clear directions and instructions. Travellers who know about such systems or, rather the lack of any system, often make pre-arrangements with tour operators or hotels or taxi services in advance. If you get down there without a pre-arrangement, you will be confused, and you need help!
File picture of the Colombo airport
In such airports, after going through the exit gate you would notice dozens of people staring at you; some may even follow you offering taxis or hotels or local currencies; some may even grab your luggage and run off. Sometimes you get a scary feeling as these people approach you often pretending to help you. Even if you are not comfortable with these offers, there are situations where you have no choice other than getting their service. It is an “opportunity” to grab your money, simply because there is no proper system with clear information as well as a convenient arrangement of logistics.
Rent-seeking
There are various ways of “finding money without earning it” and economist Anne Krueger termed it “rent-seeking”. As we talked about Anne Krueger’s latest publication on international trade last week, I remembered her seminal journal publication on “rent-seeking” in 1974. In general usage, “rent” is the payment for using a property. In economics, however, the term has a deeper meaning which is related to an income generated by land more than the price, which is “unproductive” by nature. Thus “rent-seeking” means looking for incomes from “unproductive” activity.
If you look around carefully, you would notice that this type of unproductive activities is quite common in our environments. The important point to ponder is that they do not make a difference to the nation’s wealth as such income is not born out of production. This means they don’t contribute to progress and prosperity of a nation.
However, the question is, if income is supposed to be born out of a productive activity, then how is it possible that someone could get income from an unproductive activity. The answer is that, although it is an unproductive income of the rent-seeker, it has been earned from a productive work carried out by someone else. Therefore, you can argue that it is unfair for someone to grab another’s hard-earned money just by engaging in an unproductive activity.
My opening remarks about the two kinds of airport clearly show that the “absence of a proper system” has created an “opportunity” for rent-seekers. Anne Kruger’s main contribution is, however, not in this area, but rather its opposite; it is more about how the “presence of a system” creates “opportunities” for rent-seeking which exist in regulated economies and how such rent-seeking activities cost the economy. In that sense, rent-seeking can be even formal and legal in legitimated regulatory systems just like it can also be informal and illegal in the form of bribery, corruption, smuggling, and black markets.
Half a century ago
About half a century ago when Anne Krueger was writing on rent-seeking in regulated and protectionist economic systems, the “world of economics” was a different one. There were tight import controls in many of the developing countries in order to get rid of their trade-dependency and to support local production. However, the irony was that it was impossible to cut down all imports.
The governments adopted not only high tariffs, but also various non-tariff barriers too. These measures included taking over the import business into government hands, allocating import licenses and import quota to private businessmen – often to those businessmen who are connected to politicians and bureaucrats, and controls over the release of required foreign exchange.
Ultimately, the policies proved to be a failure everywhere in the developing world – growth slowed down; poverty and unemployment rose; foreign exchange shortage worsened. The local markets were “too small” to allow economic growth, job creation, and poverty reduction, while there was no export growth to sustain foreign exchange earnings. Bigger countries could still drag on with these policies, but smaller countries quickly came to a standstill.
At the same time there were four small countries in Asia which, however, did not subscribe to these policies – Singapore, Hong Kong, Taiwan and South Korea. As they all looked out for the international markets, they had an “unlimited world market” to grow fast, setting examples for the rest of the world.
A regulated economy
At that time in Sri Lanka, there were “check points” on main roads all over the country. The police were deployed to stop the vehicles going on the roads at the check points for checking. There were not many people owning private vehicles at that time so that many of the vehicles running on the roads were public buses. They stopped these busses at the check points and got the passengers out. Then they checked the vehicle everywhere, and then the passengers and their luggage.
They were searching for “rice”. Transporting more than two pounds of rice was a punishable offence in the 1970s. Eating rice at restaurants was also banned for two days of the week; instead, the restaurants had to serve boiled local yam varieties such as sweet potato or cassava. There was a severe supply shortage of rice and other food items as well as other basic consumables. People would buy basically the “local produce” as imports were controlled and was subject to either government monopoly or import licenses.
The students who were selected to the University of Peradeniya were fortunate; they had residential facilities within the university premises. But the students who came to Colombo had to face a real problem; there were no residential facilities so that they had to find private accommodation outside the university. The owners of the private boarding houses had laid down a condition for the tenant university students; they should bring “rice” along with them if they were to be accepted to a boarding house. Carrying a rice bushel from the village to Colombo was not an easy task for the students; they had to get a permit from the Grama Niladhari and certified by the Government Agent to carry more than two pounds of rice!
It was not unusual that some people were caught at the check points for violating the rice-transportation ban; they were arrested, presented at the court, cases were heard and fined or jailed. It was a regulated economy.
Cost to the nation
Just because of a set of regulations, the government had to put up check points at a cost. The police, the officials, the lawyers – they all had to perform particular tasks formed by the regulations; their salaries represented incomes for rent-seeking. All the procedures, including public administration, judicial activity, related paperwork and other activity; all were costs. All these created rent-seeking activities of a formal and legal nature, taking someone’s money.
One could ask the question whether eliminating all types of regulations is the answer. It is not; as we saw in the two kinds of airports, eliminating all regulations creates other opportunities for rent-seeking. In fact, the term “de-regulation” is a widely misunderstood term. What is important is the “quality of regulation” aiming at minimizing the scope for rent-seeking and enhancing the incentives for productive activity.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).