Rent-seeking is destroying our cities. I know that’s a strong statement, but it’s more than deserved. Let me explain.
The phrase “rent-seeking” is an economic term originally identified in connection with monopolies. It has now grown to provide a better understanding of government regulation and, more sinister, abuse of power and privilege. It doesn’t really have much to do with leases, which is where you hear the word rent thrown about quite a bit. It actually stems from Adam Smith’s tripartite division of income, namely profit obtained from investment, wages earned through labour or rent earned through the lease of an asset. Rent-seeking is the practice of making income without the risks (and rewards) normally associated with investment or the toil and effort normally associated with labour. It represents money made without the rent-seeker actually making a real contribution to the productivity of the economy.
Another way to identify the practice of rent-seeking is to examine incidents of when a third part interferes in the availability of an otherwise accessible transaction. In a more obvious context, take the billboards in our cities. Anyone who wants to put a billboard up has to get the approval of the local government authority that regulates the advertising we see in our cities. In Lahore, it is the Parks and Horticulture Authority. The PHA, thus, interferes with the free availability of advertising space in the city and the income it makes from regulating permission to erect billboards is income in the form of rent-seeking. Last year, the PHA netted some Rs350 million in “revenue” collected from the regulation of billboard advertising.
The PHA is not the only institution that collects its income in this manner. Parking thekas are a common manner in which public sector organizations earn income through rent-seeking. Here, the outsourcing or subcontracting of parking space to the private sector represents an interference between automobile drivers and the availability of free parking spaces. The money collected by, say, the Civil Aviation Authority by auctioning airport parking thekas is, thus, one of that organization’s income streams and a perfectly good example of rent-seeking.
Development authorities in our cities also earn money through rent-seeking. For example, permission from a local government or urban development authority (like the LDA in Lahore, the CDA in Islamabad and the former KBCA in Karachi) is necessary for the construction of a house or building. This permission, even if granted on merit, comes at the expense of some development or commercialization fee. The fact that there is a government authority keeping all of us from commercializing our homes and using the land to set up a gaudy “7-Star” high-rise is a relief, even if the exorbitant fees earned by charging for such permission is a form of rent-seeking income.
These examples are good illustrations of the difficulty in distinguishing “good” types of rent-seeking behaviour from “bad” rent-seeking behaviour. After all, there are valid arguments that the activities that generate rent-seeking income are legitimate government responsibilities. Imagine, for example, what our cities would look like if there wasn’t anyone responsible for regulating billboards. Imagine how greedy developers would take innocent investors and the public for a ride if building permission wasn’t needed before the construction of a high-rise.
In most cases, government interference is necessary. But a good rule of thumb to distinguish good from bad rent-seeking income is to ask whether the government institution engaging in that rent-seeking behaviour has i) other forms of income; and ii) provides a service for the fee it charges.
According to this formulation, the PHA’s regulation of billboards falls clearly within the category of bad rent-seeking behaviour as billboard regulation is i) the main source of income for this organization; and ii) there is no real regulation of advertising hoarding in the city. The reason why this rent-seeking behaviour is bad is because the PHA, on this income model, in order merely to survive, must, will and shall continue to permit the erection of more and more billboards in the green belts of our city, even at the cost of the environment and safety.
The newly permitted LCD screens installed on major intersection — and which have, quite rightly, been condemned by the traffic police and ordinary citizens as dangerous, and whose stand-alone generators are sources of dangerous levels of sound and smoke pollution — is a case in point. Where else in the world is public space allotted for commercial use without regard to the environment or safety? The answer is simple: only where the allotment of such public space is the only form of income for the people responsible for regulating such allotments. One must applaud Mian Ejaz, the DCO of Lahore, for acting promptly and ordering that these life-threatening billboards be shut down.
I should point out that the PHA isn’t the only organization that has given permission for these extremely dangerous LCD billboards: The Lahore Cantonment Board has also permitted the installation of these life-threatening billboards at the Walton Road/Cavalry Ground junction. One is also bewildered at the number of “regular” MMT billboards now standing not in the green belts of the cantonment, but inside military land itself! One wonders whether this use of Class A and Class B lands in a cantonment area can be connected to some military purpose (which is the definition of these types of lands in the Cantonment Land Administration Rules, 1937). One also wonders whether the rent from such billboards is collected by the cantonment board, the MEO, the Ministry of Defence or whether it is pocketed by the occupants of the Class A and B military on which the billboards stand.
How does rent-seeking affect our cities? The main income of the town administrations in Lahore is property tax, which is money the local government makes on every transaction between private parties. But this income does not represent an investment made or service provided. Likewise, the main income of the CDGL and the LDA — other than provincial receipts and grants (which are like handouts and keep the city’s development agenda pegged to the provincial government’s whim) — is from things like commercialization fees and income earned by auctioning parking thekas and so on. But are these commercialization fees used for development? Does anyone see the new parking facilities? No.
The great problem with making money through rent-seeking is that this income does not represent a stimulation of the economy. Income from investment is good because it represents a return on investment earned by growth. Income from wages is good because it also represents income resulting from activity in the economy. Income from rent-seeking, on the other hand, is much like an old dowager, too insolvent to invest and too old to work, but who keeps her home fires burning by occasionally pawning the jewellery and the odd plot of land left to her by her dead husband. It’s a tragic way to have to live life, even if the jewels are exquisite. This is what our cities are like. Not investing or providing adequate services, city fathers have taken to commercializing residential land, permitting the construction of dangerous billboards and so on. They are, quite literally, pawning the jewels of our urban heritage. The question is what will happen when there are no jewels to sell?
The writer is an advocate of the high court and a member of the adjunct faculty at LUMS. He has an interest in urban planning. Email: ralam@n exlinx.net.pk