In­com­plete Mar­kets

The Economic Times - - The Edit Page - ERIC WERKER

Are rents, or ex­cess prof­its, good for de­vel­op­ment? We seek to an­swer this ques­tion by ex­am­in­ing panel data at the in­dus­try level and ap­ply­ing an­a­lyt­i­cal meth­ods from the com­pe­ti­tion-and-growth lit­er­a­ture to a larger group of coun­tries along the de­vel­op­ment spec­trum. Eco­nomic the­ory sup­ports both sides of the ar­gu­ment, of­fer­ing con­flict­ing ad­vice for com­pe­ti­tion pol­icy and anti-cor­rup­tion ef­forts.

Sur­pris­ingly, there has been lit­tle sta­tis­ti­cal re­search in the last decade and a half since data avail­abil­ity has im­proved…. In­dus­try-level man­u­fac­tur­ing data demon­strates a neg­a­tive ef­fect of rents, mea­sured by the markup ra­tio, on pro­duc­tiv­ity growth. The neg­a­tive ef­fect is strong­est in poor coun­tries: high prof­its stymie eco­nomic de­vel­op­ment rather than en­able it. The rent-seek­ing mech­a­nism of our model shows that high rents are as­so­ci­ated with a slower re­duc­tion in tar­iffs. A coun­try’s aver­age markup in man­u­fac­tur­ing is a strong neg­a­tive pre­dic­tor of fu­ture eco­nomic growth, in­di­cat­ing that we may be mea­sur­ing a phe­nom­e­non of the broader busi­ness en­vi­ron­ment…. Poor coun­tries grow faster than rich ones be­cause of the ben­e­fits of catch-up, but those coun­tries also tend to have higher rents, which slows growth. De­vel­op­ing coun­tries have a tail­wind from be­ing poor in the catch-up sense, but a head­wind from be­ing poor through an in­fe­rior po­lit­i­cal econ­omy of rent-seek­ing busi­ness.

From “Prof­its and Eco­nomic De­vel­op­ment”

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