When government regulations establish a privileged position for certain companies or individuals it often creates opportunities for rent-seeking — an abstract economic concept perfectly illustrated by the plight of Khartoum’s 20,000 wheelbarrow users.
Typically, rent-seeking involves firms like regulated power monopolies leveraging their privileged position in a marketplace to extract excess profits by suppressing competition. Rent-seeking doesn’t generate wealth, it just redistributes it to those with more power and influence. The company benefits, and often the government officials involved benefit, but the rest of society loses out.
The regulations that enable rent-seeking are usually deeply entrenched and difficult to dismantle – for no reason other than the fact that someone, somewhere is benefiting from them.
The BBC recently examined a peculiar, yet classic, example of how such nonsensical regulations hamper entrepreneurship and economic growth: wheelbarrow fees in Sudan. According to the report, local Sudanese in Khartoum are not allowed to own their own wheelbarrows. Instead, they are forced to rent them from contractors who have made a deal with the local government.It’s a great example of rent-seeking. Literally. The short video highlights one man, Al-Sadeq, who delivers produce to market stalls with a wheelbarrow. Instead of owning the wheelbarrow – as one might easily assume he would – he is instead forced to rent it at a hefty price from the contractors. This rental fee eats heavily into his daily profit. Sometimes he nets as little as half a dollar a day, thanks to the wheelbarrow fee. Imagine being a plumber who was legally forced to rent his tools every day. Or a musician who was not allowed to buy the guitar she uses for every concert performance.
A key quote in the video perfectly sums up why such regulations are so so hard to change: “Trade officials say the government benefits too much from the system to change it.” According to the report, the government depends on the fees to cover their budget and therefore fails to remove the regulations, despite the broader economic damage they cause.
How did this come about? I have no idea. Somehow, these contractors came together and convinced the local government to disallow the buying of wheelbarrows. And now they have a monopoly and can charge whatever rents they want.
It is true that rent-seeking exists in thriving democracies — some argue it is a major problem in the telecommunications sector — but governments with weak rule of law and weak democratic institutions provide a breeding ground for corruption and rent-seeking. The ultimate solution to Al-Sadeq’s rent-seeking problem is a more democratic system with stronger rule of law. One way to help bring that about is through collective action advocating against these counter-productive regulations.
The CIPE Economic Reform Issue Paper Business Associations, Business Climate, and Economic Growth: Evidence from Transition Economies describes how such interest groups can play a positive role in development:
Not all business associations are the same….[I]nterest groups can stifle economic growth. However…the other side [of the equation] is that collective action problems can be solved in market-enhancing ways, where the end result is an improved business climate and expanded market opportunities for wealth creation….
There is a battle between market-enhancing and rent-seeking interest groups and the side that gets the upper hand in policy reform can have a significant impact on countries’ economic fates.
Judging from the situation in Sudan, it looks like Al-Sadeq and all other wheelbarrow users in Khartoum could benefit from an interest group that promotes entrepreneurial activity and a friendly business climate, rather than one that promotes rent-seeking – both conceptually and literally.
Ryan Musser is a Program Assistant for Africa at CIPE.
Published Date: July 23, 2014