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The Political Economy of the Rent-Seeking Society

01 Jan 1974-The American Economic Review (American Economic Association)-Vol. 64, Iss: 3, pp 291-303
TL;DR: In this article, the authors studied the impact of competitive import licenses on the economy and the relationship between welfare cost of quantitative restrictions and tariff equivalents, and showed that the effect of wage legislation on equilibrium levels of unemployment.
Abstract: Studies the impact of competitive import licenses on the economy. Value of rents associated with import licenses; Relationship between welfare cost of quantitative restrictions and tariff equivalents; Impact of wage legislation on equilibrium levels of unemployment. (Из Ebsco)
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Journal ArticleDOI
TL;DR: This paper showed that differences in physical capital and educational attainment can only partially explain the variation in output per worker, and that a large amount of variation in the level of the Solow residual across countries is driven by differences in institutions and government policies.
Abstract: Output per worker varies enormously across countries. Why? On an accounting basis, our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker--we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language.

7,208 citations

Journal ArticleDOI
TL;DR: This article showed that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which are referred to as social infrastructure and called social infrastructure as endogenous, determined historically by location and other factors captured by language.
Abstract: Output per worker varies enormously across countries. Why? On an accounting basis our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker—we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language. In 1988 output per worker in the United States was more than 35 times higher than output per worker in Niger. In just over ten days the average worker in the United States produced as much as an average worker in Niger produced in an entire year. Explaining such vast differences in economic performance is one of the fundamental challenges of economics. Analysis based on an aggregate production function provides some insight into these differences, an approach taken by Mankiw, Romer, and Weil [1992] and Dougherty and Jorgenson [1996], among others. Differences among countries can be attributed to differences in human capital, physical capital, and productivity. Building on their analysis, our results suggest that differences in each element of the production function are important. In particular, however, our results emphasize the key role played by productivity. For example, consider the 35-fold difference in output per worker between the United States and Niger. Different capital intensities in the two countries contributed a factor of 1.5 to the income differences, while different levels of educational attainment contributed a factor of 3.1. The remaining difference—a factor of 7.7—remains as the productivity residual. * A previous version of this paper was circulated under the title ‘‘The Productivity of Nations.’’ This research was supported by the Center for Economic Policy Research at Stanford and by the National Science Foundation under grants SBR-9410039 (Hall) and SBR-9510916 (Jones) and is part of the National Bureau of Economic Research’s program on Economic Fluctuations and Growth. We thank Bobby Sinclair for excellent research assistance and colleagues too numerous to list for an outpouring of helpful commentary. Data used in the paper are available online from http://www.stanford.edu/,chadj.

6,454 citations

Book ChapterDOI
TL;DR: In this article, the authors discuss the reasons for the persistence of corruption that have to do with frequency-dependent equilibria or intertemporal externalities, and suggest that corruption may actually improve efficiency and help growth.
Abstract: Corruption has its adverse effects not just on static efficiency but also on investment and growth. This chapter discusses the reasons for the persistence of corruption that have to do with frequency-dependent equilibria or intertemporal externalities. There are many cases where corruption is mutually beneficial between the official and his client, so neither the briber nor the bribee has an incentive to report or protest, for example, when a customs officer lets contraband through, or a tax auditor purposely overlooks a case of tax evasion, and so on. The idea of multiple equilibria in the incidence of corruption is salient in some of the recent economic theorists' explanations. There is a strand in the corruption literature, contributed both by economists and non-economists, suggesting that, in the context of pervasive and cumbersome regulations in developing countries, corruption may actually improve efficiency and help growth.

2,743 citations

Journal ArticleDOI
TL;DR: This paper found little evidence that open trade policies are significantly associated with economic growth, in the sense of lower tariff and nontariff barriers to trade, and showed that the indicators of openness used by researchers are poor measures of trade barriers or are highly correlated with other sources of bad economic performance.
Abstract: Do countries with lower policy-induced barriers to international trade grow faster, once other relevant country characteristics are controlled for? There exists a large empirical literature providing an affirmative answer to this question. We argue that methodological problems with the empirical strategies employed in this literature leave the results open to diverse interpretations. In many cases, the indicators of openness used by researchers are poor measures of trade barriers or are highly correlated with other sources of bad economic performance. In other cases, the methods used to ascertain the link between trade policy and growth have serious shortcomings. Papers that we review include those by Dollar (1992), Ben-David (1993), Sachs and Warner (1995), Edwards (1998), and Frankel and Romer (1999). We find little evidence that open trade policies-in the sense of lower tariff and nontariff barriers to trade-are significantly associated with economic growth.

2,706 citations

Journal ArticleDOI
TL;DR: In this article, the authors used the Jakarta Stock Exchange's reaction to news about former President Suharto's health to assess the value of political connections and found that as much as a quarter of a firm's share price may be accounted for by political connections.
Abstract: While political connections have been widely discussed in the literature on corruption, little work has been done to assess the value of these connections. This paper uses the Jakarta Stock Exchange's reaction to news about former President Suharto's health to address this issue. By examining the difference in share price reactions of firms with varying degrees of political exposure, a market valuation of the proportion of a firm’s value derived from political connections is inferred. The implied value is very high, suggesting that as much as a quarter of a firm’s share price may be accounted for by political connections. (JEL D21, G14)

2,560 citations

References
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TL;DR: In this paper, the authors examined why rural-urban labor migration persists and is even increasing in many developing nations despite the existence of positive marginal products in agriculture and significant levels of urban unemployment, and concluded that in the absence of wage flexibility an optimal policy would include both partial wage subsidies or direct government employment and measures to restrict free migration.
Abstract: This study examines why rural-urban labor migration persists and is even increasing in many developing nations despite the existence of positive marginal products in agriculture and significant levels of urban unemployment. Conventional economic models have difficulty reconciling rational behavioral explanations with growing levels of urban unemployment in the absence of absolute labor redundancy in the overall economy. This paper formulates a 2-sector model of rural-urban migration which recognizes the existence of a politically determined minimum urban wage at levels substantially higher than agricultural earnings. The distinguishing feature of the model is that migration proceeds in response to urban-rural differences in expected earnings with the urban employment rate acting as an equilibrating force on such migration. The overall model is used to demonstrate 1) that given the politically determined high minimum wage the continued existence of rural-urban migration in spite of substantial urban unemployment represents an economically rational choice on the part of the individual migrants and 2) that economists standard policy recommendation of generating urban employment opportunities through the use of "shadow prices" implemented by means of wage subsidies or direct government hiring may lead to a worsening of the urban unemployment problem. Welfare implications of alternative policies associated with various programs to retain rural population are assessed under the assumption that the full wage flexibility suggested by economic theory is politically unfeasible; it is concluded that in the absence of wage flexibility an optimal policy would include both partial wage subsidies or direct government employment and measures to restrict free migration. The basic model is a 2-sector internal trade model with unemployment the 2 sectors being the permanent urban sector which specializes in production of manufactured goods and the rural which either uses all available labor to produce agricultural goods or exports part of the labor to the urban sector. It is assumed that the typical migrant retains his ties to the rural sector but the assumption is not necessary for the argument.

5,592 citations

Posted Content
TL;DR: In this paper, an economic behavioral model of rural urban migration is formulated which represents a realistic modification and extension of the simple wage differential approach commonly found in the literature and this probablistic approach is incorporated into a rigorous model of the determinants of urban labor demand and supply which when given values for the crucial parameters can be used among other things to estimate the equilibrium proportion of the urban labor force that is not absorbed by the modern industrial economy.
Abstract: An economic behavioral model of rural urban migration is formulated which represents a realistic modification and extension of the simple wage differential approach commonly found in the literature and this probablistic approach is incorporated into a rigorous model of the determinants of urban labor demand and supply which when given values for the crucial parameters can be used among other things to estimate the equilibrium proportion of the urban labor force that is not absorbed by the modern industrial economy. Additionally the model will provide a convenient framework for analyzing the implications of alternative policies designed to alleviate unemployment by varying 1 or more of the principal parameters. A more realistic picture of labor migration in less developed nations would be one that views migration as a 2 stage phenomenon: in the 1st stage the unskilled rural worker migrates to an urban area and spends a certain period of time in the "urban traditional" sector; and the 2nd stage is reached with the eventual attainment of a more permanent modern sector job. This 2 stage process allows one to ask some basic questions concerning the decision to migrate the proportionate size of the urban traditional sector and the implications of accelerated industrial growth and/or alternative rural urban real income differentials on labor participation in the modern economy. In the model the decision to migrate from rural to urban areas is functionally related to 2 principal variables: the urban rural real income differential and the probability of obtaining an urban job. To understand better the nature of the supply function to be used in the overall model of the determinants of urban unemployment it is helpful to state the underlying behavioral assumptions of the model of rural urban migration: it is assumed that the percentage change in the urban labor force as a result of migration during any period is governed by the differential between the discounted streams of expected urban and rural real income expressed as percentage of the discounted stream of expected rural real income; the planning horizon for each worker is identical; the fixed costs of migration are identical for all workers; and the discount factor is constant over the planning horizon and identical for all potential migrants. The model demonstrates the overall net impact of allowing these parameters to vary over time and/or choosing alternative values. It underlines in a simple and plausible way the interdependent effects of industrial expansion productivity growth and the differential expected real earnings capacity of urban versus rural activities on the size and rate of increase in labor migration and therefore ultimately on the occupational distribution of the urban labor force. Possibly the most significant policy implication that emerged from the model is the great difficulty of substantially reducing the size of the urban traditional sector without a concentrated effort at making rural life more attractive.

2,889 citations

Journal ArticleDOI
TL;DR: In terms of the extant FEMA provisions, the creation of charge (pledge) on the shares of an JV/WOS of an Indian party in favour of domestic / overseas lender for the purpose of availing facilities (funded or non-funded) by the Indian party and / or the concerned JV / WOS is under the automatic route as mentioned in this paper.
Abstract: (i) Creation of charge on shares of JV / WOS / step down subsidiary (SDS) in favour of domestic / overseas lender In terms of the extant FEMA provisions, creation of charge (pledge) on the shares of an JV / WOS of an Indian party in favour of domestic / overseas lender for the purpose of availing facilities (funded or non-funded) by the Indian party and / or the concerned JV / WOS is under the automatic route.

230 citations

Journal ArticleDOI
TL;DR: The argument that free trade is on the whole economically more beneficial than protection is one of the most fundamental propositions economic theory has to offer for the guidance of economic policy as mentioned in this paper. But the intellectual effort which has gone into the elaboration and refinement of arguments about the harmful or beneficial effects of tariffs has been accompanied by almost no effort to assess the magnitude, or even the existence, of the effects which theoretical analysis shows to be possible.
Abstract: E proposition that freedom of trade is on the whole economically I more beneficial than protection is one of the most fundamental propositions economic theory has to offer for the guidance of economic policy. Broadly speaking, the proposition stands on two legs: the static argument that interference with freedom of trade worsens the allocation of national and world resources and so reduces realized output below potential output and the dynamic argument that economic liberty and freedom of competition, national and international, provides the most favorable environment for economic growth. Both arguments have been challenged by respectable counterarguments: that there are important cases in which free competition produces non-optimal results, for which a tariff may be an appropriate corrective, and that the tariff may be a potent means of accelerating economic growth. The arguments of both types on the issue of free trade versus protection are of long historical standing. Their formulation has evolved along with the progress of economic theory and has been greatly sophisticated in recent years as a result of the development of the theories of monopolistic competition and of employment in the 1930's and of modern welfare economics. But the intellectual effort which has gone into the elaboration and refinement of arguments about the harmful or beneficial effects of tariffs has been accompanied by almost no effort to assess the magnitude, or even the existence, of the effects which theoretical analysis shows to be possible. Admittedly, the determination and measurement of the effects of alternative commercial policy systems on economic growth seems to be beyond the range of contemporary economic science, even in principle, and it is understandable that in this field economists have stuck to argument from historical examples or from assumptions about entrepreneurial behavior, methods that can lead to any desired conclusions. But the general lines of the conceptual framework required for measuring the static effects of protection on national income have been familiar for a long time, ever since Mar-

200 citations