Rent, rentier and rent seeking are words/phrases that have become increasingly common in Ethiopia. But their articulation, particularly outside of party/government pronouncements, is still vague. Here is one definition that might help. ‘Rent-seeking is an attempt to obtain economic rent by manipulating the social or political environment in which economic activities occur, rather than by creating new wealth. Rent-seeking implies extraction of uncompensated value from others without making any contribution to productivity.’ For the most part, rent is unearned income that accrues as a result of outside conditions and not necessarily obtained from internal dynamics of ventures. In other words, it is something that can be had without much productive engagement. In most cases and by their very nature, rent incomes are also immune to the vagaries of the market.
Land rent of all kinds used to be very pronounced in Ethiopia, prior to Ethiopia’s Great Revolution (1974.) In fact, the revolution also did away with real estate rent (land lordism) by confiscating all extra houses and rental properties. That has now changed and real estate rent is not only allowed today, but is actually encouraged under various guises. There are also other rents; financial rents, mineral rents, etc.! Rent usually leverages other superstructures, infrastructures (physical/institutional) publicly/commonly constructed/owned to sustain itself. Advanced knowledge (insider trading) and support (of all kinds; financial, etc.,) facilitated by all and sundry (for a price) outside of transparent market operations classify as rent-seeking activities. An example might be the systemic rigging of the whole process/mechanism of government procurements. To continuously bribe officials so that permanent favor/privilege can be secured is another bona-fide form of rent seeking. Ethiopia’s large/modern businesses, by and large, couldn’t have flourished without substantive rent- seeking activities, akin to countries previously under central planning. In our country, there is hardly any perceptible entrepreneurship (outside of rent) behind most of the formal private sector! In the lingua of our rent seekers, ‘let’s make business’ is not a desire to engage in productive venture, but is a shorthand/declaration to engage in rent seeking activities.
The business of real estate, (commercial/residential) if done transparently and competitively doesn’t necessarily fall in the category of rent seeking. Nonetheless, throughout the ages and in various countries, regulations were/are devised to make sure rent/rent-seeking economic activities would not take over a country. The good old USA was notorious when it came to fighting rent seeking, long before crony capitalism became the modus operands of its conglomerates/corporations. It penalized unearned income/rent by levying exorbitant/punitive tax on rent income. 80 and 90% tax rate on rent income was not uncommon! But that was then, when governance could be influenced by people and not capital alone! Only last year the 0.01% increased their wealth by half a trillion dollars, without raising a finger, because of the central bank’s (Fed) decision to pump liquidity into the financial system. The whole policy move was to favor the one percenters. As a result, for example, Bill Gates increased his wealth by another USD15 billion last year! Whichever way you cut it, this is rent income! See Smith’s article next column and Damon’s on page 38. On the other hand, countries like the oil kingdoms actually live off of rent and relish it to the full. Maybe it is from such places our nascent private sector got its inspirations. Besides oil rent, for example, all business activities in the various kingdoms must be sponsored by natives who don’t have to do anything except sign a piece of paper. The signing of papers/licenses would allow natives to earn rent income from the subsequently established businesses. This is rent income par excellence!
In developed countries there are all sorts of ways to discourage house rent escalations, particularly in low and middle-income housing sectors. The foremost is appropriate taxation. For example, besides rent control and aggressive tenant protection, (eviction constraints) there are also property taxes/lease payment, etc., to address the task at hand. Moreover, the tax rate on unearned income is much more (at least used to be) than regular, say corporate income tax. In developing countries, without some sort of regulation to discourage rent income, credits allocated to preferred productive sectors of the economy (by the state) soon find their way to sectors like that of real estate, etc. What is even worse, when an economy is geared towards blatant rent seeking activities, the bureaucracy of the state itself becomes rent seeking and ends up abusing kosher entrepreneurs engaged in productive vocations! The Ethiopia of the last two decades unfortunately, is a good example of this. Since the bureaucracy is the human face of governments/states policy, this can spell trouble to ruling parties all over. One fact must be recognized while trying to fight rent-seeking in Ethiopia. People engaged in all sorts of rent-seeking activities now number not in the hundreds or thousands but in the millions, compliment of FIRE (Finance, Insurance, Real Estate) and corrupted Federalism! It would require a protracted policy coupled with vigorous implementation to arrest the epidemic. The governments/states in Tunisia & Egypt crumbled because of entrenched rent-seeking activities, which dominated all economic lives. Believe it or not, ultimately rent-seeking will trigger chaos/revolution, wherever!
Let us elaborate further. In Ethiopia high salaries are taxed at 35%, just like corporate income tax. On the other hand, rent income from RRE/CRE (residential real estate/commercial real estate) is only taxed at a rate of about 15%. This must be looked at seriously so that all activities don’t migrate to the rental businesses. There is also a different aspect of rental business many don’t appreciate. Say for example a pilot with Ethiopian Airlines earns 60,000 birr a month. She will have to pay 35% of (most) her income. But if this pilot for some reason loses her job (becomes disabled, etc.,) income will not be forthcoming from the work place. Or when a business, even a more established ones fail because of various happenstance, liquidation might be faced or forced. But when it comes to rental income, even if the owner bites the dust, rent will still accrue without much effort. This is what makes rent income different and naturally attractive to so many. In addition, the consequence of being free from the hustle and bustle of running active businesses (labor, credit, supply, sales, etc.,) might result in the creation of a stratum of parasitic lumpen bourgeoisie that can easily spawn degenerate culture of all sorts across society. See Polk’s article on page 39. In the final analysis, it is because of such built-in features rent income is taxed at a higher rate than most other businesses in many countries (let us hope the revenue raised from rentals will help build low income housing.) Here is an advice to our chronic rent seekers/oligarchs: “The ultimate goals of making money are balance and independence from money.” An Chu. Good Day!