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Mon, 23 October 2017 05:49:51
Sri Lanka airport taxis: A paradise of rent-seekers
22 Sep, 2009 06:40:04
By W A Wijewardene
Sept 22, 2009 (LBO) - Rent-seeking, the use of one’s time, knowledge and efforts to earn an income which is not directly contributory to the national wealth, has been frowned upon by economists for many decades.
Jagdish Bhagwati, Columbia University economist, branded India’s economy as a paradise for rent-seekers when India had everything under control, nicknamed ‘licence raj’, since independence in 1947 to mid 1990s.

He in fact coined the phrase ‘directly non-productive economic activities’ to describe India’s vast-spread rent- seeking economy.

Rent-Seeking is as Harmful as Money Laundering

Like money laundering, rent-seeking too is harmful, injurious and inimical to the good health of an economy.

However, the irony has been that, politicians in both developing and developed countries, while taking action on a global basis to outlaw money laundering, have by word and by deed promoted opportunities for ‘rent- seeking’ in their respective economies.

Hence, the recommendation which mainstream economists often make to policy makers in governments that a full-stop should be placed to rent-seeking if an economy is to grow on a sustainable basis has been largely left unheeded.

Normal Economic Activities

How does rent-seeking differ from normal economic activities? In a number of ways.

In a normal economic activity, all the people who are involved in the economic activity make a value addition to the activity thereby contributing to create wealth. Hence, the removal of anyone from the process would reduce the value and make it impossible for the activity to take place. In other words, everyone involved in the activity makes his or her living by adding to the value. Therefore, the payment he or she would receive for the services provided is not at the expense of the others.

Take, for example, rice production. Farmers produce paddy by toiling the land and using other types of inputs needed for that.

Millers buy that paddy and mill into rice consumable by consumers.

Wholesalers and transport providers bring that rice to the market and distribute among retailers.

Consumers buy rice from the retailers and enjoy a good rice meal.

All these people add value to rice at every stage and provide an essential service to the process of making it available to the ultimate rice-eaters. The removal of anyone from the process would interrupt its smooth functioning and impose hardships on others in the process.

For instance, if the miller is removed, either the farmer or the wholesaler or the transporter or retailer or the consumer has to mill the paddy before consumption. It is not impossible, but it entails an additional unwanted hardship that each party would impose on himself or herself.

Similarly, the removal of any other person from the process would require the others to devote their time, energy and effort to provide the service given by the removed person. Thus, in normal economic activities, all the people involved are essential, all of them add value to the production and payments received by all of them are fully justified.

Room for Rent-Seeking

How could this smooth economic activity be distorted, giving room for rent-seeking by some?

Suppose, hypothetically, the government makes it necessary for transporters to obtain a ‘transport licence’ to take paddy or rice from one place to another. To issue the licence, the government has to appoint an officer or establish a bureau. To police it, it has to set up road blocks at strategic places and appoint further officers to man them.

Then, it has to strengthen the judiciary and prison services to try and execute punishments on the violators. The salaries paid to all these officers or the costs of running all the bureaus do not add value to production of rice. Hence, they could be removed without affecting the production, transportation and consumption of rice. Since the government’s intervention does not add value to rice production or is not necessary for the process, the costs incurred thereon represent a loss where no one gains meaning a ‘deadweight’ loss and an opportunity for some people to earn a rent.

When people realise that earning this income is easy and convenient, everyone flocks to seek it, thereby creating a rent-seeking economy. Once it becomes wide-spread, it is impossible to dismantle it as has been experienced in many countries.

Though people appear to have been employed and doing a service, they, in fact, do not add anything to the national wealth and live on the wealth created by others. They eventually grow like a parasite that constantly feeds on the body of a person. Once the person is no longer able to sustain, both the person and the parasite will see their end.

The Dangers of Rent-Seeking

That is why economists frown upon rent-seeking and prescribe policies to eliminate it.

It reduces efficiency, induces people to use their resources unproductively for rent-seeking activities, contributes to create an underground economy and promotes money laundering. From a morality point of view, it also leads to immoral and unethical practices on which courts are subsequently called upon to pass judgments. Hence, once an economy becomes a rent-seekers’ paradise, its unproductive activities thrive and its production base dwindles, making it difficult for the economy to sustain itself. Eventually the old glory of the economy will become a matter in the past.

Rent-Seeking at Katunayaka Airport

The writer had a first-hand experience in rent-seeking at the official taxi service operated by the Katunayaka Airport Authorities.

Every airport has a taxi service (some even a coach service or a fast train service) to facilitate air passengers to travel from the airport to their desired destinations. Since most of the planes land in the night and other public transportation services are not available at that time, airports have assured safe, comfortable and convenient travel to passengers through their official taxi services.

In the case of foreigners, the quality of this taxi service is their first impression of a country.

Hence, countries have taken an extra effort to provide a quality taxi service at the airports, so that foreigners have an incentive to visit the country again and again. The countries desiring to promote tourism as a main economic activity have looked after their airport taxi service well. Some notable examples from the region are Singapore, Thailand and Malaysia.

Taxi Counter Employs Unnecessary Staff

At the Katunayaka Airport, when one steps out of the Customs Barrier, there is a counter at which a passenger could hire an airport taxi. When the writer approached the counter, there were two male officers behind the counter and both of them were holding their hands to ears speaking on mobile phones.

None of them thought it necessary to service the customer who was now waiting at the counter. After about five minutes, one of the male officers, while still being on the call, waved his free hand to someone inside and a lady officer stepped to the counter to take the order from the writer.

The employment of three officers to write taxi orders at the counter was in stark contrast to the single-person manned taxi counters one could see in many countries. In fact in Singapore, the order writing counter has been completely abolished by creating a ‘taxi queue’ outside the terminal with only one facilitator to direct passengers to the appropriate taxis which also wait in line to receive passengers. The additional people who work at the counter at Katunayaka are, therefore, rent seekers who do not add value to the service and without whose service, the taxi service could well be run.

After the order has been produced on the computer print-out, another person has been employed to escort the passenger to the appropriate taxi along with the order paper. This person’s service appear to be essential, because taxis are not lined up in the order of the orders issued and passengers find it difficult to identify the correct taxi for which the order has been written. But, in a market where the taxis are lined up in some order and the order papers are issued in that order, this additional person’s service is not needed. Hence, though it appears that he is engaged in some service, the taxi service, with proper order of taxis lining up, could be run without him.

What one would find at Katunayaka are not taxis which one would find at other airports. These are simply box-like little vans which do not have air-conditioning and are incapable of smooth driving. On many occasions, in addition to the passengers, drivers too take upon themselves the chance to provide a free ride to their friends who also travel on the same route after completing their duties at the airport. Passengers, though unwilling and reluctant, do not have a choice and acquiesce passively. It raises the important issue of safety of the passengers if the travel is in the night.

Inducements for Private Rent-Seeking

The basic factor is that these box-service operators do not get enough business to sustain themselves. They do not get enough business because they provide a sub-standard service. Hence, the drivers try to negotiate with passengers some private hiring presumably without the authority or the knowledge of the airport authorities. According to the drivers, the box-like vans are owned by private operators who have registered their vans with the airport. Airport authorities too would have succumbed to the pressure from influential parties to register those sub-standard vehicles.

It is, therefore, a full-blown rent-seekers’ paradise at the Katunayaka Airport. But, the bad image which it has created in foreigners and other local passengers cannot be easily removed.

How to Eliminate Rent-Seeking?

The source of rent seeking is governments’ monopoly building in providing services and introduction of rules, regulations, licensing requirements and interventions in the market activities. All these are done by governments in the name of promoting and safeguarding public interest. But, they also generate unintended consequences in the form of breeding rent-seekers living on the wealth created by other productive workers.

Hence, to eliminate rent-seeking, the expansion of the governmental activities has to be stopped, if the governments have already expanded, a greater part of such activities should be handed to private people and if the governments need to handle some of them, they should simulate private sector in running those activities.

In addition, unwarranted rules, regulations, licensing requirements and intervention in the markets should also be dismantled or halted.

The writer is a retired deputy governor of the Central Bank of Sri Lanka. To read previous columns in the series go to the WatchTower section on the main navigation panel or click on the links below.

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READER COMMENT(S)
22. Kavan Nov 04
The Airport also Needs a proper bus service to transport those who don't want to pay over Rs2000 for the trip.

I did discover that there are A/C Intercity Buses to Katunayaka town costing about Rs150/- from Colombo Fort and a Free Shuttle service to and from that town to the Airport which also serves the parking lots. It's existence is not advertised. Even after buying an extra Ticket for my bag my trip from

Mount Lavinia cost under Rs500/- compared with Rs3000/-. This just shows that there is lot of scope to be far more cost efficient and Green.

The best service I have found was in KL where you can check-in in the city and catch the Train direct to the Airport Transit Lounge without any bags to worry about.

21. Sandra Sep 30
Same thing happens in Mexico City Airport. So many people "employed" to open your door or point you to 3 meters ahead where there is the taxi line waiting for customers. And they have official tags with picture and everything as employees of the Benito Juarez Airport.

Haven't they heard by now that real economy cannot support these for long. The truth is that after experiences like this, I prefer to organize, book and pre-book everything online with my usual services and avoid meeting upfront with this unrealistic situations.

Like for instance, I want a cab in Sri Lanka or anywhere else for that matter, then I go to www.infotaxi.org or I simply Google it and so on, simple and efficient.

20. Rohan Samarajiva Sep 30
I do not fully agree with Harsha. What is needed at the airport is a concession, which requires an auction. There can be only a few taxi operators at the airport (because of space limitations and also because too many booths would be confusing; also this would allow maintenance of quality standards). Scarcity, therefore auction.

Singapore's taxi industry is cartelized. Therefore, they can do what they do. As taxis come into the stand, they are transparently assigned passengers. But it is quite possible that there is an airport surcharge that goes to the dispatcher. We have many suppliers, so I do not think Singapore model can be transplanted. Advantage of Singapore model is that taxis do not run empty in the other direction. If the design can prevent that it will be very good. If a major company like Radiant or Kangaroo gets the concession, it's possible they can run taxis full in both directions.

In 2003-04, there was a single taxi stand (2688688) at the airport (good); but it was not transparently given (bad). Then the rent seekers pushed it out. What we need is a good AC taxi service concessioned out, transparently. What comes after the comma will be the problem.

19. harsha de silva Sep 29
Mel, while the process of selecting the licensee was unusually transparent; by way of bids on the CSE, there was never a need to for a special taxi license to operate taxis brought down on a duty free basis distorting the existing market.

Why do we need a 'special licensed operator' at the airport? Taxi service is very different from, say, garbage disposal services where licenses are required.

Why could we not have a competitive taxi service (with minimum quality of service standards) like most other respectable airports. Mr Wijewardene's example of Singapore is a good one; there are numerous others.

JackPoint @ 10 was right then; but not now as far as I know. Under new rules of the Chairman of the Airport Authority Sri Lankan nationals must use the box vans.

They are not entitled to use the a/c cars at the hotel counters, say for example from Ceylon Tours or Holiday Inn. So there is no choice unless you make a fuss and refuse to use the box van. Even then, you have to write down your name, where you are going etc at the box van counter. I am not sure if that is still the case but it happened to me very recently. So the rent-seekers have been fully legitimized.

18. mel Sep 24
Anyone knows what happened to the government sale of a taxi license to a Sri Lankan company to launch a "world class taxi service"?

I think the Audi agent here got it.

The deal was done via CSE, though only one person bid for it.

The BOI promised a service with sleek salon cars, uniformed drivers and metered taxis :D

17. W.A. Wijewardena Sep 24
To Lakshman @ 16:
As usual, you have beautifully summarised the whole debate and your observation of 'santhosam' is a form of rent being earned by people on the job.

To fuss-budget @ 15:

You have very correctly and forcefully presented the root-cause of the problem: the big government. In fact, IMF usually recommends a small government, while WB through its lending programmes, promotes a bigger government.

Consider Sri Lanka's case. After SL embraced free market economy policies in 1977, the government sector expanded phenomenally. Why? Because its loan programmes all led to the creation of new bureaus or the expansion of existing bureaus. Mahaweli Authority, CEB, Agriculture Department, RDA, UDA are some examples. An irony relating to Mahaweli Authority is that it was created by WB funds; when it was filled with rent-seekers (politicians, employees, subsidiary company workers etc) the very same WB had to fund a further programme to downsize it later in 1990s. It successfully went through a VRS, but the subsequent government, desirous of keeping the 'rent-earning power' to itself, reversed the process and now again it has become a paradise of rent seekers.

16. lakshman Dalpadado Sep 24
Here are my comments on the article and the topics discussed by readers.

1. There are no taxis at the airport. Only hiring cars. A Taxi, by definition, is a hire car with a meter and the user pays according to the milage.

2. The current status quo is for the benefit of car operators, including, some well known hotels and tour operators. Basically a rip-off. They can charge any amount from unsuspecting( tourists) customers.

3. If you want a decent car - go to the Abans Travel counter at the airport. Pay and get a receipt. They have better cars and better drivers. Haggle with the price- there are no fixed prices.

4. The official ' Taxi' counter runs a car hire service. The receptionist have their favourite drivers( on' santhosams')
Most of the cars are dilapidated.

5. NO amount of economic manipulation, or imposing rules and regulations, will work unless people have integrity. USA is a prime example of a dysfunctional democracy.

15. fuss-budget Sep 24
Mr Wijewardene and Tharu,
Very true. I have also enjoyed reading Tharu's comments. But here is a puzzle. More of a philosophical one I guess. Krugman and others who want to grow the state are referred to as being 'liberal'. This is despite the policies that they advocate reducing the economic freedoms of the common man that generate taxes by engaging in activities subject to the dreaded market forces.

Here is just one example. Krugman advocated exchange controls to Malaysia during the Asian crisis.

It has been alleged that he helped sabotage efforts to create a currency board in Indonesia and sided with the mainstream US policy of bringing in regime change by de-stabilizing the Indonesian economy.
Hardly the actions of a liberal.

Stiglitz is another interventionist specialist, and he shot to fame critizing IMF action, especially in Indonesia. He would have been better off criticizing Krugman for stopping the currency board. He is another master popular 'politician', and his headline grabbing quotes are manna from heaven for any totalitarian third world ruler.

It is perhaps a given that all world bank economists believe in state intervention. If they did not, they may just as well pack up and go home and stop funding bankrupt third world governments with cheap money from developed country tax payers.

The IMF is another kettle of fish altogether. It turns the tap in the opposite direction and takes away what institutions like the World Bank gives to 'poor' (read bad government) countries.

The New York times, where Krugman's column has made him an oracle, is hardly a hotbed of liberalism either - at least in practice as its coverage of the Iraq war showed.

Governments are put in place by the common man for their benefit, to provide law and order for example, not for political rent seeking and interfering in the common man's economic or social lives.

The problem arises perhaps due to the desire of some people to impose 'economic equality'. Enforced equality is not the same thing as liberty. As the Friedrich Hayek (a Nobel laureate also) said, it is the freedom of the barracks.

On the other hand so-called conservative politicians that advocate economic freedoms (say for example Republicans) tend to be war mongers, which is the worst type of repression of human kind imaginable.

The government is a racket. Those in government - any government - will try to extend the empire at the expense of market interacting, value generating common people who want liberty and only want to live in harmony with their fellows.

It is upto the common man to make his government as effective as possible so that he and others will have liberty and happiness. Common people are hardworking everywhere. The bigger the government and the less it gives back to society in real returns the more the common man will have to sacrifice in terms of living standards.

One can argue that since the rich has greater capacity to sacrifice and has the knowledge and capacity to avoid this burden (you are rich because you have learned how to do it, so it is a circular argument) the people who lose their living standards most at the hands of government are the people we call poor. People are not poor because they are lazy.

14. W.A. Wijewardena Sep 24
Tharu, you have given me a lot of ideas to write the future Watch Towers. Many thanks.
13. Tharu Sep 24
Mr. Wijewardene,
Thanks for your well thought out comments. I fully agree that evidence indicate governments have the propensity to be corrupt/self serving. No doubt about it. But the same is true for private enterprise too. Which is worse is an empirical issue open to debate. I don't think we have conclusive evidence on either.
(A simplistic arguement is to say that the govt should ensure that private enterprises can not do so, but then again it is arguing for "big governments"!)

What we do know is that good governance and accountability are essential in prpomoting competition and social justice. Conservatives tend to believe that small governments are more likely to lead to good governance. Liberals disagree.

You are absolutely right in saying that Stiglitz & Krugman are no gurus. But the same is true for everybody else. In fact there is very little that economists universally agree. In a way that is the beauty of it too.

On the balance however, it seems that more and more are starting raise issues with "small governemnt" notions of "Thatcher- Reagan" ideology. (Active government roles in handling the current global recession is a case in point) These are some broad persepctives though. As to the specific issue you pointed out, i.e. excessive bureaucracy @ the airport, I completely agree with you.

12. W.A. Wijewardena Sep 23
To Tharu @ 9.
Your intervention has in fact educated many a reader of this column and added value. Thanks.

A few clarifications may, however, be in order.

When it comes to asymmetric information, governments are notorious breeders of the problem, rather than solution-givers, because they can
a) assume monopoly over information by decree;
b) punish people on the ground of disclosing info which they do not want to reveal;
c) issue distorted or half-true or completely untrue information;
d) use unethical and immoral practices to wield influence over information dissemination systems and media overtly and covertly.

Experience shows that governments in both the developed and developing countries have resorted to these tactics one time or the other and the public does not have control over it. Consider how governments use their superior propaganda power to condition the minds of the public and promote the virtues of governmental bureaus they propose to establish or have already established however much they are a drain to the public purse, thereby enabling those bureaus to become rent seekers.

Both Stiglitz and Krugman are rebels in the mainstream economists'family and they are not the undisputed gurus of this science.

11. Johan Sep 23
Thank you for yet another informative article.
There is some benefit to the economy from rent-seeking in that those employed in these jobs use their wages in the private sector buying goods and services. I'm not saying this is the most efficient way to stimulate spending in an economy, but there is some trickle down to the rest of us. Though I suppose, we again pay for this in price inflation.
10. Jack Point Sep 23
Good article, however a few facts may need correction.
The last time I was at the airport a few months ago, I believe I was offered van or car, a/c or Non a/c. I am not sure if this choice is still available.

I took an a/c car and although I had to request the driver to turn the a/c on, it was a fairly reasonable ride.

Airport taxi cost me Rs.2400 whereas a cheap local radio taxi costs around 1800-2200 (my vague recollection of the price; there are some that are more expensive), I think I paid about 2000; the difference between the two is the rent.

9. Tharu Sep 22
To W. A. Wijewardene,
Thanks for your comments.
Monopoly is one possible case where rents will be extracted, but not the only case. For example, information asymmetries between contracting parties can lead to extraction of rent even if no monopoly is in place. In such cases government may need to ‘regulate’ (for instance disclosure rules).

Whether ‘small governments’ lead to the elimination of rent seeking is an open question. Conservative leaning economists tend to believe so, but the liberal leaning economists believe that the government can (and need to) play an active role in the matter.

As a matter of fact many of the recent Nobel laureates in Economics such as Stiglitz & Krugman tend to be more aligned with the liberal view. There are ample theoretical and empirical evidence to support both sides (or indicating failures of each). Now, I refuse to take a stand on this, but it’s important to note that there are two sides of the story.

8. W.A. Wijewardena Sep 22
To Tharu @ 7.
Thanks for the comment which is elucidating and enlightening.

Though the word 'rent-seeking' was used to describe the situation under reference, the correct phrase would have been as Bhagwati termed it 'directly non-productive economic activities'or DNEA. Since it is a long term and difficult to understand, 'rent-seeking' is commonly used to refer to 'an unearned income' which is different from 'economic rent'. All bureaucracies, whether they are big or small and well intended or ill intended, tend to develop into rent-seeking agencies, as claimed by Simon Niskanon in his 'economic theory of bureaucracy'.

The public has a little control over this as is being explained in another article by LBO under the title 'Fiscally Clueless'.

The type of exploitation by millers (or for that matter by anyone including the consumers) as you have described can take place only in a monopoly situation and the solution to the problem lies in promoting competition. Government rules, regulations and intervention cannot promote competition; in fact they worsen the situation because they contribute to breed an army of rent-seekers as has been shown by SL's experiment with the Paddy Marketing Board.

The final solution to the elimination of the rent-seeking economy is the establishment of a small government that facilitates competitive private enterprise.

7. Tharu Sep 22
The points raised are valid, but it seems that the author is confused as to the meaning of rent seeking. Rent seeking generally means the “excess distribution to any factor in a production process above the amount required to induce the factor into the process or continue its current use”. (See “Economic Rent and the Industry Supply Curve, by A. Ross Shepherd 1970” for a detailed discussion) The examples given are issues pertaining to excessive bureaucracy.

Rent seeking behavior can take place even if every party in the process performs an essential role. In fact it is human nature for everyone to attempt such behavior. For example, in the authors’ example of rice production, as long as the miller can effectively exploit the farmer and/or the consumer he’s extracting economic rent. Regulations/bureaucracy may in fact be essential to stop such rent seeking.

What author encountered at the air port is unproductive bureaucracy, not necessarily rent seeking.

6. Non-govt Sep 22
To fb
Good that at least there are (were) few govt employees that noticed the inefficiencies in their institutions and outsourced part of it.

Anyway, I didn't suggest privatising Central Bank because most people wouldn't like it (Even though I support it including privatising of two state banks). But, I strongly believe that powers of SL Central Bank on creating money (according to politicians will) needs to be curbed. In order to develop the country we need to go back to the era of Monetary Board. One reason for Singapore's growth is having an independent monetary board.

5. Bhumi Sep 22
Excellent article. Sri lanka is full of such unproductive jobs and with all those rather than making things easy for people to get the work done, it adds to the red tape.

To get some work done there are so many forms to fill, and so many documents to submit. Ultimately people have to bribe those officials to get things done. Unless the Government takes some drastic steps to change the way public services operate, things will not move but stagnate for a long time.

4. lasantha Sep 22
I too agree on this taxi part. i found that airport taxi always vans they have and no A/C and not good one too...

And private taxi, i paid little high for comfortable, but, finally i have seen that that counter person also join in taxi and driver and he was traveling in front seat until his house reached... What is the point i pay the money and travel like this...:-(

3. fb Sep 22
The writer did in fact oversee a trimming of the institution through a VRS as well as well as outsourcing non-essential activities.

Since pensions were mentioned, the writer was instrumental in bringing better yields to the EPF, as well as the development of a market based yield curve.

The list is long. Privatizing the Central Bank is a good idea but shocking to most people, even ardent supporters of such initiatives.

When central banks were private (the Bank of England for instance) it was held accountable for the economic messes it created, unlike now.

Competition in money is coming through dollarization (at least in deposit narkets NRFC deposits etc and some credit) but very few countries have true central bank competition.

The prime example of central bank competition is now Zimbabwe, where inflation is close to zero.

2. Non-govt Sep 22
Glad to see an ex-govt employee of SL talks about reducing govt intervention on managing day to day activities. However, I'm sure that the writer would have resisted if the govt institution he was working was to be privatised at the time he was working.

This is the sad situation is Sri Lanka. People don't realise that expanding govt jobs will eventually destroy the country. From the school days parents want their children to have a secure job with a pension and they always count on a govt job.

I myself was a govt employee for 6 years but I never wanted a pension, but my colleagues always were after the pension. Until Sri Lankans don't come out of the box and start taking risks, I don't see a bright future for the country.

Politicians will always manipulate this weakness by giving more and more govt jobs and increasing the inefficiency. Ultimately every Sri Lankan will pay for a huge inefficient public service.

1. Channa Sep 22
Quite an interesting article. Unproductive or often duplicate man power for the same job is not only a waste but chasing away would be investors.

In Sri Lanka rent-seeking is a result of two factors. In govt it's over-unionisation (eg CEB) and in the private sector it's due to monopolistic desires (Katunayake Taxi service).