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OP-ED: “For my friends everything, for my enemies the law!”

  • Published at 06:19 pm February 15th, 2021
Policy capture

We need to ensure a level-playing field where powerful friends do not get away with undue privileges while the rest are shown the rulebook

Three years ago, this very month, the World Bank published a major report on the Middle East called “Private-Resistant Policy Making in the Middle East and North Africa” that I co-authored. 

The report focused on policy capture and the granting of privileges to politically well-connected businesses -- a problem ubiquitous in that region and not uncommon elsewhere. 

The granting of undue privileges to cronies is unethical, and also harmful for economic dynamism. 

Several studies have shown that when businesses can make money by getting privileged treatment from friends in government, they lose the incentive to be efficient. 

As a result, productivity falls and jobs are not created -- no surprise that the Middle East is burdened with large numbers of educated, but unemployed, young people. 

To begin, we must understand the nuances of this phenomenon, including the distinction between policy capture, privilege-seeking and petty corruption. 

Addressing the governance problems of Bangladesh requires a granular treatment of these subjects, including clarifying their similarities and differences, and the relationship between them.  

Policy capture refers to a situation where a small group of very influential people can almost dictate policy to the government. 

For example, politically connected businesses may use their influence to get policies enacted that offer certain fiscal subsidies or tax exemptions, or regulations that create barriers to entry for potential competitors (regulations may be written such that entry is explicitly prohibited or applied in a manner that makes entry costs prohibitively high for many firms). 

There is not much scope for negotiation is here; any push back from government functionaries is muted and short-lived. 

The latter may get some benefits from the process, but it is at the benevolence of the powerful businesses. 

To borrow some terminology from the literature on institutions and development, policy capture is a closed, ordered deal. 

It benefits a few (hence closed) and its outcome is predictable since both parties honour the deal conditions (hence, ordered). 

Privilege seeking is somewhat different. A privilege-seeker is unable to dictate a favourable action but must negotiate for it with officials. 

These actions may involve policy-making, such as setting a particular tax rate or getting a favourable decision within a given policy parameter, such as case-by-case tax exemption or a favourable tax valuation. 

Privileges may also involve resources directly allocated by the state, such as public procurement contracts, public land, or subsidised credits. 

If well-connected businesses who get such privileges are not particularly efficient or innovative, such resource allocation is sub-optimal.     

Well-connected businesses may also connive with regulatory officials and misuse the regulatory tools, such as tax or factory inspections or withholding license renewals, to harass actual or potential competitors. 

Such predatory business practices are not uncommon in Bangladesh and have also been used to grab ownership stake in profitable businesses through intimidation. 

The granting of privilege is also a closed deal benefitting a few people, although typically more people can negotiate privilege than capture policy. 

However, unlike policy capture, it is a dis-ordered deal and hence its sustenance is not guaranteed. 

As is shown by the occasional actions against some privileged people, including their arrests, there is always a risk that the privileges will be taken away. 

Moreover, access to privileges in one area, such as allocation of government land, may not guarantee privileges in other areas, such as customs administration. 

This creates uncertainty for privileged businesses since the outcome sought by them, such as the realisation of a large project, often depends on buy-in from several government agencies.

Finally, there is petty corruption. 

This may be called an open deal, accessible to many businesses or individuals.  

Open deals are not privileges for a few, but systematic favouritism available to many, such as the possibility of getting a driving license by bribing the relevant officials. 

As many bribe-givers in Bangladesh would attest, you cannot always be sure the bribes will deliver the expected outcomes. 

In such cases, petty corruption is an open, but disordered, deal. 

But when systemised, i.e., with predictable outcomes, corruption becomes open-ordered deals. 

Many years ago, Óscar Raymundo Benavides Larrea, a politician in Latin America, another region beset with policy capture and privilege, made the audacious statement quoted in the title of this article. 

As we strive in Bangladesh to shift from the current high growth-low productivity trajectory to growth with productivity, we need to ensure a level-playing field where powerful friends do not get away with undue privileges while the rest are shown the rulebook. 

We need to ensure that we do not fall into the Middle Eastern trap of policy capture and privileges.

The author is an economist, previously with an international development agency

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