4 1 UTILIDAD DE UN SISTEMA DE IDENTIFICACIÓN DE CALIDAD.

5.2.1 Rent and Rent Seeking

While the literature related to rent-seeking begins with Gordon Tullock’s paper in 1967,86 the term ‘rent-seeking’ was coined by Anne Krueger in 1974.87 She described rent-seeking as a competitive behaviour for the rents which arose from government restrictions upon economic activity. She also distinguished perfectly legal rent-seeking from illegal rent- seeking. The latter included, for example, bribery, corruption, smuggling and black market

83

M. Olson, note 66, at 44. 84

Note 77, at 25. 85

See para.4.2 of this Chapter. 86

G. Tullock, ‘The Welfare Costs of Tariffs, Monopolies, and Theft’, (1967) 5(3) Western Economic

Journal p224. This article stated that the invested resources are wasted in unproductive activities such as

(i) crime, (ii) lobbying for tariff protection, (iii) lobbying for entry barrios or monopoly privileges. 87

A. Krueger, ‘The Political Economy of the Rent-seeking Society’, (1974) 64(3) American Economic

activity. Later on, rent-seeking, as suggested by James Buchanan, was mainly regarded as referring to attempts by groups to achieve profits through the exploitation of government restrictions on entry.88

According to rent-seeking theory, the term ‘rent’ in economics referred to product surplus from the whole income of any factor in a production process above the opportunity cost of the factor.89 Rent could not be fixed because factors flowed without barriers between industries in the freely competitive market, according to the general equilibrium theory, unless monopolies prevented this. However, new rent can be created and existing rent can be maintained or be redistributed, since no real world market can match this criterion in practice. As a result, in rent-seeking theory, rent, which is extended from considerations of pure economics, to considerations involving the political economy, includes ‘not just the monopoly profits, but also subsidies and transfers organised through the political mechanism, illegal transfers organizsd by private mafias, short-term super-profits made by innovators before competitors imitate their innovations and so on.’90

Individuals or groups will seek rent to maximise profit when the cost of seeking the rent is less than the returns obtained from investment and the costs of enhancing economic efficiency. Therefore, the concept of rent-seeking not only applies to private economic monopolies but also includes the conduct of individuals or groups attempting to obtain wealth transfers through abuse of administrative power. Both of these methods restrict free competition in the market and lead to an inefficient allocation of economic and social resources.

5.2.2 Rent-seeking and Abuse of Administrative Power in China

Undertakings, as well as administrative organs or empowered organisations, can obtain profit from the abuse of administrative power. This profit is a form of ‘rent’, and the abusive conduct can therefore be regarded as ‘rent-seeking’.

The relationships that arise between administrative power and enterprises, according to the rent-seeking theory, can be listed below:

88

E. G. Pasour, ‘Rent Seeking: Some Conceptual Problems and Implications’, (1987) 1 The Review of

Austrian Economics p123 at 127.

89

Note 87. 90

Table 3-2: The Relationship between Administrative Power and Enterprises on Rent Seeking Theory Administrative Power Enterprises Results

initiative on setting rent by abuse of administrative power on restricting competition passivity on obtaining rent illegal rent- seeking conduct passivity on setting rent by

abuse of administrative power on restricting competition initiative on obtaining rent illegal rent- seeking conduct

setting rent without abuse of administrative power passivity/initiative on obtaining rent legal rent- seeking conduct

Administrative organs set the rent while enterprises engage in a rent-seeking process. Government rent-setting conduct means the administrative merchants are operated by the government to satisfy rent-seeking, both actively and passively.91 Administrative power will be operated to set rent actively where potential benefits exist and where government organs seek to obtain these. The rent-seeking conduct will respond to the rent-setting behaviour of the administration. When administrative power is abused to restrict market competition, rent-seeking is harmful, and under the terms of the AML, illegal, and should be prevented. As an alternative, government organs may set rents at the request of rent- seeking individuals or groups. However, as before, once this administrative power is abused, the rent-seeking group should be responsible for the illegal conduct. If there is no abuse of administrative power, no matter how active or how passive the rent-seeking is, the conduct is legal, although it may still have the effect of leading to the misallocation of resources. In general, the initiative of rent-seeking groups is the most common element of these activities. However, the initiatives of government and government organs need special consideration when abuse of administrative power is prevalent.92

91

Wei He, a Chinese economist, divided the government rent-setting activities into three categories: Initiative on rent-setting, passive on rent-setting and non-intension on rent-setting in his book Rent-

seeking Economics. However, related to abuse of administrative power, the effect but not the intension

determines the boundary of legal and illegal conduct. Thus, the government rent-setting activities in this thesis are only divided into initiative and passivity. W. He, Rent-seeking Economics [寻租经济学], (1999)

China Development Press. 92

More materials on rent-seeking in China are available at: A. Young, ‘The Razor’s Edge: Distortions and Incremental Reform in the People’s Republic of China’, (2000) CXV(4), The Quarterly Journal of