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Розділ 1 Економіка природокористування і еколого-економічні проблеми
Influence of rent-seeking and its derivatives
on sustainable development: the case of Ukraine
The paper is dedicated to the concept of rent-seeking and its derivatives in the form of political-economic groups. The central problem stated is the influence of rent-seeking system on the level of sustainability in Ukraine. The paper aims to assess the impact of rent-seeking to the environmental quality more specifically because this is the lacking element for the overall assessment of the system’s influence on sustainable development (SD). To do this we define the main political-economic groups in Ukraine, analyzes their property and the amount of state subsidies obtained by each group. And then we apply general theory of social and private marginal cost and benefit to the Ukrainian data. In a result we see the environmental dangerousness of each group described. After all general conclusions of the influence of rent-seeking system on all the aspects of SD (such as economic, socio-political and natural capitals; inter- and intragenerational equity) are made.
The idea of rent-seeking was developed in the western political and economic theory. But in Ukraine it can be well felt from its practical side. Therefore it is interesting to apply the classical theory of rent-seeking to the empirical material gathered in the country and to see what the consequences of the Ukrainian rent-seeking system for may be.
Rent-seeking is a deeply political-economic concept. And previously it used to be studied either in the context of its influence of the economic efficiency of on the decision-making process in Ukraine. But in this paper we will also look on the impact of rent-seeking and its derivatives on the environmental issue and assess the results of the system for the overall sustainability level.
Before speaking of rent-seeking itself let us have a look on a couple of basic concepts that will help to understand its origin and nature.
The first one is the notion of market failure. According to Kahn market failure is inability of market to allocate resources efficiently [1, p. 14]. Still the economic dictionary of McMillan argues that it is more about inability of market system to provide with certain goods on the most desirable or optimal level and not just efficiently [2, p. 342]. Failure here is not inability of equaling quantity demanded to quantity supplied. It rather means that market forces do not maximize social net benefits by equaling marginal social benefits with marginal social costs. Therefore market failure may create a divergence between private costs and social costs.
In the context of assessing the influence on environment we need to remember that any production is accompanied with labor, resource and capital costs, which are both costs for the producer and for the society in whole. In other words labor, capital and resources costs are elements of both private and social costs. But there is also cost for pollution from production – and this is the cost only for society and not for individual producer (unless special environmental taxation is provided). This leads to disparity between private cost and social cost. Social costs appear to be higher than the private one because both of them include private costs of production and social cost includes additionally the cost of damage generated by pollution [1, p. 14]. Finally, this means that society gets not the optimal ratio of the goods produced and environment saved but gets more products and less environmental quality than it would rather receive.
Among the reasons of market failures we can find for example externalities, imperfect competition, imperfect information etc. But in the context of our problem the most important reason of market failure is an inappropriate government’s intervention. The latter is the case when government intervenes into the economy not to correct a divergence between private and social costs, but for some other purpose, which can worsen the status quo and make the divergence between the costs even bigger [1, p. 20].
And finally rent-seeking is one of the causes of inappropriate government’s intervention. Originally by rent-seeking was meant the using of administrative power of the state to transfer wealth between groups of people [3, p. 25], and this transferring in the classical rent-seeking was not accompanied by goods’ production. Therefore typical rent-seeking was considered to be an unproductive activity that aimed to get benefit. This actually meant that part of the profit which the rent-seeking enterprise receives was not supported by the real product, so it was an unproductive profit-making activity, which created the so called virtual economy [4, p. 84-107; 5, p. 54-63]. And on the territory of the former Soviet Union rent-seekers used to emerge out of former enterprise managers who had informal connections in power cabinets.
Rent-seeking was profitable due to the possibility to allocate part of resource rented in the own pocket of rent-holder, and shortly due to the system of soft budget constraints not only existing resources were reallocated but also unexisting, such as for example debts, which used to be compensates by the government . In other words, some additional income from nowhere was placed in the pocket of rent-holder.
Still when the physical rent started to exhaust rent-seeking managers started to produce something in order to prolong the rent at least in the other form. And on this new stage of rent-seeking another, more general definition was introduced which states that rent-seeking is the desire to get material benefits at the expense of society or individuals through the relations with the government [7, p. 599].
Due to various mechanisms of state support rent-seekers had possibility to obtain sound capitals during the first years of transition. As far as connection with politics was effective for revenue increasing this tandem formed into a stable one and was often represented by the same people from the rent-seeking and the political side. Such merges out of political and economic power cannot be called rent-seeking ones anymore but rather a derivative from it. In the popular literature and in public discourse such merges are often named ‘oligarchy’ (or ‘financial-industrial groups’ as well) but for us it is preferably to name them ‘political-economic groups’ (PEG)b.
Such PEG’s system differs from the rent-seekers’ one in 2 ways. Firstly, there are less PEGs than rent-seekers due to the physical limitations of the political systemc, and secondly, PEG obtain both political and economic power and rent-seeker only gets a grant from the official, who enables him to use the rent.
Rent-seeking is characterized by semi-market conditions, when one has the possibility to sell his product without constraints and there is favorable regime for him during production cycle so there is no risk to ‘loose the game’. To obtain such an advantaged status entrepreneurs make unofficial deals with governmentals that lead to legislative support to the economic activity of certain group or individual.
Rent can be granted to the enterprise in a variety of ways. It may be subsidy or tax advantage for example. Subsidy is a governmental payment that creates a gap between price for consuming and cost for producing [2, p. 514]. It is an address non-refundable help in monetary or natural form given to the economic actor in expense of governmental funds. It can be direct, in the form of money granted or indirect like immunity of debts or crediting advantages [8, p. 129]. Lunina and Vincenс [9, p. 119-121] support this point saying that subsidy in the wide meaning includes not only budget transfers and tax advantages but may be present in the form of state control upon prices, limiting entry to market, abolishing of debts, budget investments, customs advantages, low rate credits, state demands for production etc.
Generally, rent (in our political-economic meaning) is any payment to the enterprise which exceeds the sum which would be received in market conditions [7, p. 599]. But it may be not only payment but any conditions created for the described result.
Figure 1 demonstrates us the described divergence between social and private costs.
Figure 1 – Divergence between private and social costs under conditions of subsidy
Axis x here stands for the quantity of produced good (proportional to produced pollution) and y reflects the price for the produced good. MNPB curve means the marginal net private benefit, MSC – marginal social cost and MPC – marginal private cost. MPC(S) is also the marginal private cost but now under the conditions of subsidy. Q* point is the social optimum while Q1 is the producer’s optimum and Q2 – the producers optimum under subsidy.
From the graph we cam see that MPC for production reduces when subsidy or tax privilege is received and optimum for producer goes from Q1 to Q2 in this case instead of moving towards Q* which is the social optimum. So inappropriate government’s intervention creates more production and therefore more pollution without the compensation to the society.
From the Figure we see that if following the original idea of policy, which is in establishing of justice, policy-makers should make all the possible so that points A and B coincided in order to quadrate contradicting interests in the society. But subsidies do the contrary thing and in this meaning contradict the goal of policy.
Ukrainian economy of transition period it characterized by severe presence of corrupted rent-seeking elements in the political-economic decision-making process. Pretty soon they also transformed into the oligarchic elements according to our definition and are represented now by such major political-economic groups like Donetska, Kyivska, Dnipropetrovska, Pinchuk’s and Poroshenko-Yushchenko’s ones (See Table 1). All of them own rather environmentally dangerous industries as can be also seen from the table; but as far as they have an entry to power cabinets they produce and as a result damage environment as a social good even more intensively according to the model described above. Therefore their influence on the environment differs not only due to difference in property units but also due to the level of state support, and table one contains also a rude assessment of the subsidizing level of each group. This level was identified according to the links which group has with the government representatives, to the subsidies used by the groups and according to the working style of the enterprises they own.
To give examples of used subsidies let us say that, for example, Donetsk group works under the law ‘On special economic zones and special regime of investments in Donetsk region’ . According to the law it works on the territory of 19 special economic zones (which is also a form of subsidy) in Donetsk region which means tax franchising or freeing. As a result we see here substantial taxation advantages which include no income tax for 3 years, later it comprises only 50%, dividend tax is 10%, no Value Added Tax on devices and no customs on resources [16, p. 138]. Besides this energy debts of the regional enterprises are frequently abolished by the government.
As far as one of the traditional businesses of the Donetsk group is coal mining we can mention another bright fact. When the profitability of Ukrainian coal was estimated to be on the level of ‘– 50%’ (!) the branch still received governmental subsidies which in 1.5 times exceeded budget expenditures on research and development [17, p. 18].
Dnipropetrovska PEG obtains petroleum refinery and a set of machine-building plants  and is one of the less market ones as far as it is the closest to the current President and uses a lot of state subsidies.
Pinchuk group is named after one of its leaders who is a close relative of the President Kuchma  and due to the strong political standing the group uses much of subsidies but it also shows tendencies towards marketization of its working style.
Table 1 – Ukrainian PEGs: business and level of subsiding
Source: based on 10, 11, 12, 13 and 14.
This can be seen from such facts that the group rejected part of its subsidies in the pipe business in order to be able to trade with the WTO countries. And enjoying the governmental support the PEG had trouble with antidumping investigations and could not deal with highly payable clients due to this.
Poroshenko-Yushchenko PEG accepts nearly no subsidies and still is very strong, therefore it is usually considered the most market-friendly one which in our case means environmentally-friendly.
The group obtains numerous plants and factories, among them shipbuilding, 4 confectionary and 3 autoplants , a lot of enterprises in food, energy, petroleum refining and trade, machine-building, chemical, building materials, agricultural, metallurgy sectors etc. But a big part of this groups’ business is in the service or finance spheres which are not environmentally dangerous .
It is important that the PEG is represented by non-subsidized sectors and has a big part of new small business representatives.
Shifting to the overall data let us say that in a result of PEG lobbying there were 10.8% of Ukraine’s budget dedicated to subsidies in 1996 and 9.3% in 1997, while in Central and Eastern Europe this figure was 1.7 – 4.4% in 1991-1995 [9, p. 124].
Sometimes subsidies are also given to some environmental enterprises or projects still there is no much sense in this if government gives simultaneously environmental subsidy and a subsidy to a coal industry as it was in 1998 [9, p. 125].
And considering all direct and indirect subsidies in Ukraine their quantity is about 20% of state budget per year [9, p. 130].
Speaking of the influence on sustainability level let us note some important issues concerning the sustainability itself. The first one is that SD deals with 3 types of capital which are natural, economic and socio-political. And the second thing is that SD aims to provide equity both between generations and inside them.
The negative influence of rent-seeking on the economic and political development was studied and estimated a lot. Thus rent-seeking injures economy in the following ways:
(a) Subsidies given to rent-seekers decrease the amount of the state budget while this money could alternatively be used for social or environmental needs;
(b) The system of state support damages competitiveness and market functioning, the whole system becomes less dynamic, and perspective economic growth is violated. Rent-seeking prevent the principle of market’s invisible hand work and this decelerates development.
As for the damage to political capital rent-seeking and especially its derivative – the PEGs system leads to:
(a) Weakening of public influence on the political elite. The decision-making process in the high politics in a result of corruption becomes dependent not on the fulfilling of the people’s will but rather on satisfying of narrow group interests. And this in its turn also leads to the decreasing of life quality because with the oligarchic political system neither economy nor social sphere can develop that well. And cooperation with more powerful blocks which could also help the country is under the question when the political system is corrupted.
But from the material provided in this paper we can also conclude that rent-seeking has a substantial influence of the environmental quality as well. And we can name the main element of such harm:
Through the analysis of empirical data on the resources (how many environmentally dangerous enterprises does the group obtain) and working style (how many subsidies does the group receive) of every PEG we can determine the rate of sustainability danger correspondent to every group’s activity, which can be estimated for each SD capital separately and for the sustainability overall. In this study we have pointed out qualitative results of observations but the perspective for future researches is to estimate the numerical values of the negative impact.
And as for the second pillar of SD – inter- and intragenerational equity we also observe the harm caused by rent-seeking which is in:
(a) Increase of economic gap between rent-seekers and non-rent-seekers (intergenerational violation);
(b) Rent-seekers redistribute current resources without investing in future production, which is steeling from the future generations (intragenerational equity violation).
In the paper we could see that due to the complex reasons rent-seeking substantially harms sustainable development by decreasing economic, socio-political and environmental capitals and by violation of the principle of two equities.
This conclusion is derived from the theoretical model and illustrated by the evidence from the Ukrainian political-economic system.
And being more specific on the environmental issue we showed that governmental subsidies given to enterprises damage the social optimum between quantity of goods produces and bads in the form of environmental pollution let as a result. And we could see that rent-seeking is one of the straightest reasons for such an anti-environmental subsidizing.
Влияние „поиска ренты” и его производных на уравновешенное развитиеe:
Работа посвящена понятию «поиска ренты» и его производным в форме политико-экономических групп. Центральной поставленной проблемой является влияние системы «поиска ренты» на уровень уравновешенности в Украине. Работа ставит за цель более детально оценить вклад «поиска ренты» в качество окружающей среды, так как именно этого элемента не хватает для общей оценки влияния системы на уравновешенное развитие (УР). Для этого мы определяем основные политико-экономические группы в Украине, анализируем их имущество и количество используемых государственных субсидий. А затем к этим украинским данным применяются теоретические основы общественной и приватной граничной стоимости и прибыли. В результате мы видим уровень опасности для окружающей среды каждой из описанных групп. И наконец приводятся общие выводы относительно влияния системы «поиска ренты» на все аспекты УР (такие как экономический, социально-политический и естественный капиталы; равенство между поколениями и внутри поколения).
a^ Sergiivna, MA student (Political Science), Simon Fraser University, Canada, BA (Political Science), University of 'Kyiv-Mohyla Academy', Ukraine.
© A.S. Salnykova, 2005
b since ‘oligarch’ is emotionally non-neutral, ‘financial-industrial group’ ignores other capitals of meant by us groups (e.g. political and informational one) and the name ‘political-economic group’ expresses the notion the most specifically.
c because rent-seeking can emerge on all the levels of administrative organization, and oligarchic or political-economic grouping exists only in the connection with the limited quantity of the highest officials from the government or parliament structures.
d We make such a conclusion because effective enterprises try to go to the international market and to enter it they need to quit the rent-seeking background according to the international rules and ‘Kryvorizhstal’ plant is an excellent example for this argument
e тоже, что и «устойчивое развитие»
Механізм регулювання економіки, 2005, № 2
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