Rent seeking and rent dissipation in state enterprises

We reflect on the use of state power in state-owned enterprises. An African case study is first recounted in which a private coffee exporting firm seeks to compete against a government-owned monopoly marketing board. A prindpal theme of the study is that state enterprises retain de facto control of their markets long after surrendering any de jure monopoly privileges. Managers of the state firm and their supervisors within the dvil service forma coherent Iobbying group whose interest is to defend the enterprise from competition. With this study as a backdrop, we offer a theory of rent seeking in state-owned enterprises. We argue that state firrns in less-developed countries eek to maximize costs within the limits of the subsidies offered them by intemational donors. Government rent is the difference between such maximized cost and minimum cost. The portion of government rent determined by valuing inputs at competitive factor prices i dissipative in the sense that it vanishes from productive output. Dissipated govemment rent likely is larger than in the classical (Tullock) rent-seeking para-digm because a state firm's managers have little incentive tolimit their rent-seeking activities. Hence, renewed caUs for state r gulation can be expected once the present deregulation trend has run its course. "The market system provides no mechanism for its own survival."--P.T. Bauer, Reality and Rhetoric (p. 36) T he most significant event of the past quarter century has been the global retreat of the public sector. Licensing regulations have been eased, prices and exchange rates floated, trade barriers slashed, and state-owned enterprises old off. It is tempting to think these have been spontaneous reactions to the massive failure of statist econornies. Fail massively statism did, but none would have realized it in the absence of a mental yardstick, a theory of human choice. Chief among such yardsticks has been the notion that humans eek rents, that government preferences are an espedally lucrative and durable source of rents for the few who obtain them