John Menadue. Rent-seekers and the hollowing out of democracy (Repost 12/2015)

Aug 10, 2017

‘Rent-seeking’ is a term understood by most economists. It refers to the ability of powerful groups to extract special concessions and favours at the expense of the wider community.  

I noted a good illustration of rent-seeking by bloggist Ben Chu in the Independent in London on 25 August this year. He said

Ferrying goods along the Rhine in medieval times was an expensive business. Feudal lords who controlled land along the banks of the river, which was also the main European thoroughfare in the period, had a habit of hanging iron chains across the width of the waterway and extolling a fee from everyone who wanted passage. The nobles grew very rich from their tolling activities, building fancy castles overlooking the Rhine with their ill-gotten proceeds. This was a classic example of what is now known by economists as ‘rent extraction’. The operators of these tolls weren’t creating any wealth through their activities. They weren’t facilitating trade by maintaining the waterway or making it any safer for the merchants. They were merely using their privileged location to extract wealth from others. …

But how do we extinguish rent extraction from high profits due to legitimate business success. A good indicator is the extent to which their profits are dependent on political and official connections.’

These political and official connections are critical for rent-seekers. In Australia today there are many examples of how rent-seekers use their political and official connections to extract benefits for themselves at the expense of the community.

Democracy becomes a hollowed out shell when neoliberal ideology and deregulation are stalking horses to wind back the boundaries meant to contain the excesses of capitalism.

Ross Gittins in the SMH referred to four industries that ‘rule Australia – superannuation funds, miners, bankers and gambling industries’. They are the classic rent seekers although I would add major parts of the health sector.

In 2013 three of the world’s most profitable mining companies under cover of the Business Council of Australia defeated the original Resources Super Profits Tax and got it replaced by a badly-designed Mineral Resources Rent Tax. For a few million dollars of money spent on advertising and lobbying, the mining industry saved itself tens of billions of dollars. As an inveterate rent seeker the BCA now wants to increase tax on food to pay for a cut in company tax.

In opposing an Emissions Trading Scheme and a Carbon Tax, our major polluters successfully delayed for years action to combat climate change. The rent-seeking miners have also been successful in defending a fossil fuel subsidy scheme that will cost Australian taxpayers $26 b. over the next four years. While motorists in Australia pay 38c. on every litre of fuel they buy, the world’s biggest miners like BHP Billiton, Rio Tinto, Glencorp, Xstrata, Peabody and Anglo American don’t pay a cent for the fuel they use in mining, including fossil fuel mining. It is expected that in the Paris talks, countries like Australia will be asked to phase out these fuel subsidies. But in the face of rent-seekers, we now learn that Malcolm Turnbull has run for cover after a meeting of a back bench policy committee attended by, surprise surprise, the Chief Executive of the Minerals Council of Australia, Brendan Pearson. The rent-seekers have won again.

The financial services lobby has won handsomely in limiting reforms of superannuation, particularly the conflict of interest by financial planners employed by the major banks. The slews of tax breaks in superannuation for the benefit of the wealthy have been effectively defended by the rent-seekers in the superannuation sector. Fortunately the Senate seems likely to respond the government’s proposals to open up boards so industrial superannuation funds by the appointment of board members as ‘independents this reform was never about independence or improved governance. It was about ideology and giving more leverage to rent seekers in the superannuation industry.

In my blog of 30 September 2015 ‘Developers, white shoe brigade, Ferraris and yachts’ I drew attention to research by Paul Fritjers and Cameron Murray of the University of Queensland concerning rent-seeking by developers in Queensland. They said

‘Our main finding is that well-connected land-owners own 75% of the rezoned land, but only 12% of comparable land immediately outside the rezoning boundaries, indicating that [zoning] decisions were primarily driven by the relationship networks of the land-owners, rather than technical assessments of the efficiency of urban expansion locations. … We … estimate that these rezoning decisions increase the value of the rezoned land by $710 m., with well-connected land-owners capturing $410 m. of these gains at the expense of the public at large. … Connected property-developers bought land unsuitable for redevelopment on the urban fringe then lobbied state politicians and bureaucrats through their relationship networks to rezone areas where they own properties, wrong-footing both councils and other property developers.’

It was a clear example of profits being made as a result of political and official connections, just like the feudal lords along the Rhine.

In the health field the ‘stake-holders’ that governments listen to are not consumers or patients, but the AMA, Medicines Australia, the Australian Pharmacy Guild and the private health insurance companies. Through lobbying and official connections these rent-seekers easily brush aside the public interest and good policy.

The hotel and alcohol lobby work hand in hand with state governments and the political parties. Advertising on television of cricket matches is saturated with alcohol and fast-food advertising and no action is taken. The Australian captain thinks so little about the problem that he suggests that the VB advertising is about ‘branding’ and not alcohol consumption. As a public intellectual he is a very good batsman.

The gambling lobby effectively torpedoed plans by the Gillard government to curb problem gambling. Clubs Australia was too powerful.

There are over 1,000 lobbyists in Canberra who advance the interests of rent-seekers through their political and official connections. Many of these lobbyists are former ministers, officials or party employees. As governments change, these lobby firms go up and down in business success. With a Labor government in Canberra, Hawker Britton was the top of the pile. Now with its close personal connections to the Liberal Party, Barton Deakin is top of the pile.

The power of the lobbyists acting on behalf of the rent-seekers or the rent-seekers lobbying directly are corrupting and debasing our democracy. They have made it much more difficult for governments to pursue good policy of the type we saw in the Hawke-Keating and early Howard periods. Self-interest is killing off reform and with the media often embracing or not exposing these self-interested rent seekers. So much of our ‘news’ is recycled hand-outs from these rent-seekers.

It is not surprising that Australians have lost confidence in parliament and governments. And the rent seekers prosper when that happens. That is why every opportunity is taken to disparage government and our political institutions. That lies behind the unceasing campaign about incompetent government, bureaucracy and ‘red tape. It is designed to weaken the role of government in defence of the public interest.

Our democratic institutions are in serious need of reform and renewal. They are being hollowed out from within. When democracy is weekend rent seekers can prosper. Democracy must limit markets and not the other way around.

We have our modern versions of the feudal lords who use their privileged positions to extract wealth from others.

I do not make a case for big government but effective government as a key player in our democracy.


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