IAN McAULEY. Mates, lobbyists and rent-seekers

Two books, one recent the other written 35 years ago, explain how special interests are strangling the Australian economy.

“It was 22nd February 1790 when James Ruse was granted Australia’s first parcel of private land by Governor Arthur Phillip. His thirty acres was recorded as No. 1 on the Land Grants register, and sits in the heart of Parramatta”.

Cameron Murray and Paul Fritjers in their work Game of Mates: How favours bleed the nation, introduce James Ruse not only as the emancipist who kicked off agriculture in the colony, but also as Australia’s first property developer to have made a fortune out of government largesse.

Their chapter “The Great Property Development Game” takes us from 1790 to contemporary Australia, with cameo appearances by other property developers, including Eddie Obeid and former Queensland Premier Cameron Newman. According to their study of 1137 Queensland landowners, “around 70 per cent of the value gain from re-zoning went to politically connected property developers.”

Their work is a rich study of cronyism in Australia, and they don’t stop at property developers. Among others they expose are bankers, private health insurers, pharmacists, and toll-road owners.

Those reading Game of Mates seeking accounts of spivs meeting in car parks to give politicians brown paper bags stuffed with $100 notes will be disappointed: for such lurid stories they should troll through the work of the NSW Independent Commission Against Corruption. Rather, Murray and Fritjers describe a more subtle set of relationships – relationships based on old school ties, revolving doors between government and business, and political affiliations – relationships of “mates” as they properly point out.

Their work is well-researched, with what may be a disproportionate loading of Queensland case studies. Perhaps that is because both Murray and Fritjers are economists at the University of Queensland. Or perhaps there is still a little of the culture that supported 19 years of Joh Bjelke-Petersen’s government.

They conclude with estimates of the cost of these cosy relationships, and although they have plenty of data, as cautious economists they wisely don’t go beyond making rough estimates. If just one or two groups were benefiting at the cost of the rest, they could add up those costs, but when so many groups have some privilege, aggregation is more difficult. For example, farmers have their own lurks – under-priced water and subsidies for ethanol come to mind – but farmers also pay for some of the costs of privileges enjoyed by the finance sector and for less than perfect competition in commodity markets. Murray and Fritjers mention taxis, but the benefits of restricting the number of taxi plates didn’t go to the taxi-drivers.

Every year the Productivity Commission grapples with this problem in its regular Trade and Assistance Review, but unless you want to delve into detail, I recommend Murray and Fritjers. In terms that Gilbert and Sullivan may have used, when everybody’s subsidising someone else, then no one is subsidising anybody.

But it’s worse than a simple circular flow that all comes around, because this game of mates clams up an economy. The game is not only about gaining privilege for your group; it’s also about retaining it by blocking anything that comes along to upset it.

Economists refer to effort of gaining and retaining privilege as “rent seeking”.  It’s a confusing term, because it bears only a weak relationship to our everyday use of the term “rent”. Investopedia definites it as:

… the use of the resources of a company, an organization or an individual to obtain economic gain from others without reciprocating any benefits to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants or tariff protection.

I would add to that example corporate lobbying for favourable regulations. The standout example at present is the effort of the coal industry lobby not only to continue to avoid paying for the cost of greenhouse gas and other pollution (in itself a costly subsidy to the industry), but also to gain concessions to keep coal-fired generators operating.

Rent-seeking itself is costly – think of the burden of the lobbying industry itself, and of the costs it imposes on others who try to counter its influence. Most citizens would far prefer to live in a world where they didn’t have to organise action groups to oppose land grabs or make donations to environmental groups to counter the huge influence of mining lobbies, for example.

But the more substantial costs occur when the rent-seekers succeed, and these costs are hard to measure, because they are what economists know as opportunity costs. These are the costs of benefits that don’t come about because successful lobbying has blocked reforms and other beneficial changes. At a local level it may be a toll road owner blocking the construction of a railroad to the airport; at the national level it may be a professional group restricting accreditation of new members. The mining industry in 2013 brought huge and effective political pressure to thwart the government’s attempt to introduce a tax that would have helped stabilise the economy and allow the nation as a whole to share the fruits of periodic mining booms.

Murray and Fritjers’ work covers Australian cases of rent-seeking. For a more general and international context I recommend the work of Mancur Olson, particularly his 1982 book The rise and decline of nations: economic growth, stagflation and social rigidities. Olson was curious to learn why, after their wartime defeat in 1945, the Japanese and German economies had done so well. He acknowledged the usual explanations – their need to replace aged equipment, the influence of the Marshall Plan in Europe and MacArthur’s reforms in Japan. But the overwhelming factor he found in these countries was the loss of the influence of the lobby groups who, in the postwar era, had either disappeared or couldn’t find traction with the new regimes. In the victorious countries, by contrast, lobby groups were still able to exert their retarding influence. (John Menadue’s insights into a comparison of postwar Japan and Germany explains why Germany has retained its edge, while Japan has slipped back.)

In a theme that rang true with Australian policy makers concerned with tariff reform Olson wrote about the influence of arrangements between trade unions and industry groups – he called them “distributive coalitions”. The rise and decline of nations was virtually compulsory reading for anyone involved with the Hawke-Keating economic reforms.

Olson wasn’t anti-union or anti-mechanisms of distribution. When he died in 1998 The Economist in its obituary described him as the “scourge of special interests”, and summarised his work with his conclusion that  “Narrow, self-serving groups had an inherent, though not insuperable, advantage over broad ones that worry about the well-being of society as a whole.”

We saw the influence of Olson’s thinking in the Hawke Government’s emphasis on bringing  unions together to take a collective view – for example the understanding that while some workers benefited from import restrictions on shoes and clothes for others those restrictions meant high prices. Similarly Hawke encouraged peak industry associations to understand their collective interest in a well-paid workforce in secure employment.

Unfortunately we seem to have lost those mechanisms to consider the collective view. Australia is once again a comfortable place for rent-seekers doing deals with mates. Ironically the Hawke Government itself, with its public service reforms, may have contributed to this situation, because those reforms tended to make each agency and department stand alone and look after its own interests, often with the support of lobby groups with deep tentacles into those departments.

Murray and Fritjers’ work is important, not only as an expose of the cronyism that’s strangling our country, but also as a warning that we need once again to channel those efforts that have gone into rent-seeking into institutions that can work for the collective interest.

 

Ian McAuley is an Adjunct Lecturer in Public Sector Finance at the University of Canberra and a Fellow at the Centre for Policy Development. In their work Governomics – can we afford small government? Miriam Lyons and Ian McAuley explain the relevance of Olson’s work to public policy.

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In an earlier post Ian McAuley described Australia’s quadrilateral energy market, an artistic creation of deep beauty that may well have won a citation at the University of Chicago but never passed the pub test at home. The general public from the outset recognised the Thatcherian privatisations for what they were — the crime of the century. I suppose I should read the book reviewed because Paul Fritjers asked me to when challenging me to a debate after I had blamed our woes on neoliberalism generally and the teaching of F.A. Hayek in particular. Paul maintained that corruption was the… Read more »

Scott MacWilliam

Mancur Olson’s Rise and Decline should be compared with Chalmers Johnson’s MITI and the Japanese Miracle for a contrary and somewhat more sophisticated account regarding post-war reconstruction in that country. Johnson showed that it was far from a small government which oversaw the so-called `Miracle’. He also emphasised that instead of being a socialist state, as so many of his abundant and deeply ideologically determined critics claimed, Japan’s was a capitalist developmental state of the variety almost absent today, including in Japan.