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”