Rent Seeking And Economics Efficiency of Selected Manufacturing Industry of Pakistan

Abstract

The study attempts to empirically establish whether rent seeking diverts industries to non-maximizing direction resulting in lower efficiency scores and hence impaired performance of the economy as a whole. Technical and allocative efficiency scores of six manufacturing industries have been calculated using stochastic frontier analysis and data envelopment analysis on a pooled data for the year 1982 to 2005. Subjective evidence from previous studies about collusive rent seeking practices has been incorporated in the methodology. A hypothesis has been tested whether rent seeking causes inefficiency. The results show that industries with subjective evidence of collusive rent seeking empirically prove to be rent seekers with lower technical and allocative efficiency scores compared to fair industries. Hypothetical results prove that Sugar, Cement, and Automobile Manufacturing industries are involved in collusive rent seeking due to which their efficiency scores are significantly lower than fair industries which include Paints, Beverages and Fertilizer industries. In industries affected by rent seeking, profit-maximization approach is replaced by rent-maximization where the entrepreneurs lose interest in increasing productivity and resources are wasted to form collusive bodies to control market factors and have supportive regulations. To offset this affect, protection as well as privatization policies may be formulized carefully and regulatory bodies may be re-structured and neutralized to ensure that rent seeking monopolistic cartels are not formed and as a result a competitive environment is developed. The study recommends that industries may be supplied with cheaper and abundant energy sources for higher efficiency. Labor-intensive production policies may be implemented as the country is abundant in labor supply. Industrial policies by Federal Government should be based on the recommendations of Planning Commission of Pakistan and these policies should be implemented to full extent. Lastly, the public-sector manufacturing and service enterprises should be re-engineered to develop a competitive industrial environment between public and private sectors as this competitive industrial environment would outsmart non-maximizing rent seekers.