Rent-seeking and Pakistan

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Main bhi bohut ajeeb hun, itna ajeeb hun ke bas

Khud ko tabah kar lia aur malaal bhi nahi

 

This couplet by Jaun Elia reflects the regressive mindset of our society and government, which continues to promote rent-seeking in subtle ways.

Rent-seeking refers to individuals or organisations seeking economic benefits without creating any real value in the economy. This mindset stems from the flawed definition of success in our society. For many, a successful life means accumulating wealth without putting in effort. This obsession with unearned wealth gives rise to rent-seeking behaviour.

We can see examples of rent-seeking behaviour in the trading of "open plot files", a common way for people to make easy money. These files are floated by housing societies, and people trade them speculatively to profit from rising prices, often inflated artificially. This type of trading, and rent-seeking activities in general, merely shuffles wealth from one party to another without adding any real value to the economy. Besides being a zero-sum activity, the trading of open plot files and other rent-seeking activities cause additional losses to the economy due to inefficiencies and lost opportunity costs.

People often invest millions of rupees in trading plot files rather than starting ventures that could generate profits and create economic activity. Why? Because trading plot files offer quick gains with minimal effort. The regulatory framework of Pakistan also plays a role by making it easier to profit from such activities while discouraging investments that drive economic growth. For instance, trading open plot files involves almost no regulations despite having no legal standing under the SECP's laws or the by-laws of development authorities.

On the other hand, registering a new medicine that could significantly contribute to the economy is a painfully long and expensive process. It requires permissions costing around 200,000 rupees, takes an average of 1.7 years, and involves 28 visits to the Drug Regulatory Authority of Pakistan (DRAP). This time-consuming and complicated process raises a serious question: do regulatory bodies also exhibit a rent-seeking mindset? Unfortunately, the answer appears to be yes.

Regulatory bodies in Pakistan often use their power to extract economic benefits without contributing to the economy. Excessive rules, complex procedures and unnecessary paperwork serve as tools for rent-seeking. Consider the manufacturing and mining sectors, which together contribute 13.6% to the GDP. Manufacturing businesses must obtain 171 registrations, licences, certificates and other permits (RLCOs), while mining businesses require 71.

These excessive regulations not only discourage new businesses but also drive existing investors to move their capital elsewhere. Besides the indirect costs, the direct costs of such regulations are enormous. A study by PIDE estimates that the cost of regulations is more than 45% of the GDP. Without eliminating rent-seeking behaviour, Pakistan's economy cannot grow or prosper. A long-term change requires a complete shift in societal attitudes.

Addressing rent-seeking starts with giving individuals a sense of purpose. Education and media can play a crucial role in promoting collective responsibility and emphasising the need to contribute to the economy. At the same time, the government must provide incentives that encourage people to prioritise investments that create wealth over quick, unproductive gains. For example, the government needs to facilitate the entry of new businesses and promote investments by simplifying business processes, removing unnecessary regulations, and cutting down on paperwork. Moreover, regulatory reforms and checks and balances on regulatory bodies are essential to eradicate rent-seeking.