Bangladesh was born out of two violent partitions, each caused by elites’ inability to agree about the distribution of rents. It has subsequently struggled to achieve political stability based on different mechanisms of rent distribution among its elites. In the midst of quite significant instability, its economic performance improved in the 1980s. Its experience therefore provides interesting case study material to examine and elaborate the LAO framework. The geographical territory of Bangladesh, then called East Pakistan, was first carved out of the eastern agrarian hinterland of Bengal in 1947 when British colonial rule ended. Unlike West Bengal, which remained in India and which was significantly industrialized at that time, East Bengal was almost entirely an agrarian economy growing rice and jute. In the 1960s, after very limited industrialization had been achieved, another set of violent confrontations between incumbent and emergent elites in Pakistan culminated in 1971 in the independence of East Pakistan, from that point forward known as Bangladesh. In more recent years, Bangladesh has emerged as a relatively high-growth developing country with a significant manufacturing base rooted in the garments and textile industries. But it has an apparently dysfunctional governance structure and political system with frequent political standoffs between the major political parties. We will examine the evolution of the LAO in Bangladesh as a transition between three variants of a basic LAO to a fourth and final version that has elements of maturity but is vulnerable and faces problems in enabling and sustaining sophisticated productive organizations. Indeed we will argue that there appears to be a tension between the capacity of LAOs in very poor countries to achieve sustainable political stability based on the accommodation of political organizations and their ability to assist the development of productive organizations.

INTRODUCTION

Governance is what states do, and since states play a vital role in the development process, almost all economists can agree that governance must be important for development. The growing recognition within mainstream economics that governance is important, is simply a belated recognition within economic orthodoxy that the state plays a critical role even in a market-oriented society. The controversy and debate is about what the feasible governance capabilities are of a poor country attempting to develop in a global market with an essentially market-oriented economy. The answer to this is not as obvious as it may seem. The answer provided by the good-governance approach is based on a theoretical understanding of a market economy that is contested by many economists supporting the construction of a market-oriented economy. But most significantly, the good-governance approach ignores the feasibility of achieving these governance capabilities in poor countries, and therefore overlooks alternative methods of overcoming the obstacles and constraints that are preventing many developing countries from fully participating in and benefiting from the global economy.

Markets are simply mechanisms for private contracting. The good-governance reform agenda is based on the presumption that efficient markets are achievable in developing countries, and are sufficient for achieving sustained growth and development. These presumptions are derived from a specific reading of institutional economics that is plausible in theoretical terms, even though many of the theoretical links that it asserts can be strongly challenged in terms of alternative readings of orthodox economic theory.

So far in our analysis of rents, we have looked only at the implications of the rents themselves and not at the implications of the processes through which rents are created or maintained. In fact, since rents are, by definition, beneficial for the recipients, they are likely to spend resources to create, maintain or transfer particular rents. Rent-seeking is the expenditure of resources and effort in creating, maintaining or transferring rents. These expenditures can be legal, as with most forms of lobbying, queuing, or contributions to political parties. But they can also be illegal, as in the case of bribes, illegal political contributions, expenditures on private mafias, and so on. The processes are of tremendous significance because the resources they use up are a social cost, and they determine the types of rents which are created and maintained in a particular society.

Conventional rent-seeking theory, however, assumes that rent-seeking only results in the creation or protection of monopoly rents, and, in addition, it makes restrictive assumptions about how the rent-seeking cost is determined. Nevertheless, the contribution of this theory was to tell us that the cost of rent-seeking was an additional cost of maintaining a monopoly. However, the conventional rent-seeking framework has to be radically extended if it is to be relevant for the real world. Institutional economics and political economy both suggest directions in which the rent-seeking framework can be extended.

The rapid economic development of a number of Asian countries over the past three decades lulled many observers into taking excessively complacent positions about the new ‘emerging markets’. The financial crisis of the late 1990s, which brought this period of growth to a temporary halt, resulted in an equally dramatic change of mood about the prospects of these countries. Led by the International Monetary Fund (IMF) and many academics, there was a widespread feeling that rent-seeking and corruption underpinned the crisis, and that without uprooting the institutional structure of ‘crony capitalism’, the prospects for the region were dim. The period as a whole thus provides a rich source of evidence with which to examine the role of rent-seeking in economic development. How important have corruption, patronage, lobbying and kickbacks been in developing countries? Have they been responsible for slow growth or the reverse? What determines the magnitude and effects of different types of rents, of corruption and of patron-client exchanges? How did Asian countries grow so rapidly in the 1980s despite an apparently widespread problem with rent-seeking? To answer these questions, we start by examining theoretical models and asking how they need to be amended and extended. Corruption, clientelism and other forms of rent-seeking were widespread during Asia's high-growth period and it is this experience which most of our case studies address. Understanding the role of rent-seeking in the period of growth is critical for assessing the adequacy of explanations of the subsequent crisis in terms of crony capitalism which many commentators were quick to offer ex post.

For the economist, rents refer to ‘excess incomes’ which, in simplistic models, should not exist in efficient markets. More precisely, a person gets a rent if he or she earns an income higher than the minimum that person would have accepted, the minimum being usually defined as the income in his or her next-best opportunity. A glance at the real world tells us that rents as excess incomes are widespread in all types of economies. Rents may take the form of higher rates of return in monopolies, the extra income from politically organized transfers such as subsidies, or the extra income which comes from owning scarce resources, whether natural resources or specialized knowledge. What does economic theory say about the effects of such excessive incomes or ‘rents’? This chapter begins with an analysis of rents in conventional neo-classical economics and proceeds to examine how this analysis needs to be extended (and, to some extent, has already been extended in recent years) to analyse the different types of rents which exist in real economies. Drawing on both neo-classical and non-neoclassical economic theories, we see that the efficiency and growth implications of different rents can be very different.

While some rents are indeed inefficient and growth-retarding, other rents play an essential role in growth and development. This variability has important policy implications. The identification of some rents as ‘efficient’ challenges the policy rule-of-thumb of the liberal market model which says that the removal of institutions and rights which protect rents is always desirable as a way of moving towards greater efficiency and better economic performance.