Power, Property Rights, and Economic Development

POWER, PROPERTY RIGHTS, and ECONOMIC DEVELOPMENT THE CASE OF BANGLADESH

MOHAMMAD DULAL MIAH YASUSHI SUZUKI

Power, Property Rights, and Economic Development

Mohammad Dulal Miah • Yasushi Suzuki

Power, Property Rights, and Economic Development The Case of Bangladesh

Mohammad Dulal Miah University of Nizwa Birkat Al Mawz, Oman

Yasushi Suzuki Ritsumeikan Asia Pacific University Beppu, Japan

ISBN 978-981-13-2762-9    ISBN 978-981-13-2763-6 (eBook) https://doi.org/10.1007/978-981-13-2763-6 Library of Congress Control Number: 2018959008 © The Editor(s) (if applicable) and The Author(s) 2018 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: © Dhaka at Night / Getty Images Cover Design by Oscar Spigolon This Palgrave Macmillan imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-­01/04 Gateway East, Singapore 189721, Singapore

Tihami Mohammad, Azwad Abdullah, Azlan Abdullah

Foreword

Professor Yasushi Suzuki, a post-Keynesian economist by academic training, has been an active contributor to the field of institutional political economics on financial development in the last couple of decades. His pragmatic thinking and ideological belief, which have been reflected in his intellectual contributions, have surely benefitted the discipline in numerous ways. As an avid reader and enthusiastic follower, Professor Suzuki does not take things for granted; but rather, his unique way of dealing with accepted theories is simply to judge them against the prism of pragmatism and rationality. This distinct characteristic as an academician has earned him a lot of admirers and a host of inquisitive followers. Dr. Mohammad Dulal is but one among them who always professes to be a student of development economics. His ardent desire and unquenchable curiosity to comprehend economic problems in an unconventional way have helped him refine his understanding about economics and development. This book is the result of the effort of this duo. The book presents a very pragmatic but often neglected issue of economics—the system of property rights. New institutional economics (NIE) in general, and property rights in particular, have been the subject of extensive academic discussion in the field of economics for much of the twentieth century, perhaps owing to the failure of neoclassical economics to provide a satisfactory explanation to many economic problems developing countries are facing today. In addition, the field has received extended attention on the idea that ‘institutions matter’, evidenced by the awarding of Nobel Prize in Economics to Ronald Coase, Douglass North, and, very recently, Oliver Williamson vii

viii 

FOREWORD

and Elinor Ostrom. Their works have undoubtedly helped establish new institutional economics as a distinct discipline in the field of economics. Although the mainstream economists have reservations accepting NIE as an alternative to new classical or orthodox economics, the complementary role of NIE can no longer be neglected. Institutions are the rules of the game that encourage and constrain certain behaviors of individuals or organizations in a society. The key institutions a state enforces include the system of property rights, which defines the rights an individual or group holds to make decisions about the use to which specific assets may be put. Enforcement of rights requires either voluntary cooperation from the non-owners of a property or a central enforcement authority. In general, citizens band together to form governments with enough coercive power to implement the rule of law. The coercive power that a government is bestowed with may turn into a double-­edged sword for the society because power, when it is lodged in human hands, is prone to be abused. This entails that a realistic analysis of property rights must include government as an important element. It is strange that the mainstream analysis of property rights has more often than not neglected this issue. This book goes beyond this tradition. It focuses on political institutions and their role in shaping the structure of property rights, emphasizing on Bangladesh as a case. An interesting contribution of the book lies in its vibrant way of capturing economic facts through the lens of standard property rights framework. It draws on the tradition of law and economics to decipher social effects of such economic policies as non-market allocation and price control which prevail in most developing countries still today when free market principles are penetrating every sphere of the economy. These policies create a sort of distributive process which contributes to the perception that property rights are unstable and contested. Agents compete and spend resources to influence government’s assignment of property rights, which in economic parlance is perceived as rent seeking. Although all rents are not economically detrimental, some are obviously welfare-­reducing. The book spells out the conditions under which rents are welfare-­ enhancing and conditions under which they are welfare-reducing. These are the basic stories the book wants to tell in a less esoteric manner and with sufficient evidence. The saddest episode of property rights is that they are currently being threatened by a variety of state, national, and international forces, especially by those who are the custodians. It is thus essential to understand

 FOREWORD 

ix

the economic setbacks stemming from improper structure of property rights and the sustainable policy alternatives required to ameliorate them. One catapulting endeavor is to call attention from policymakers, regulators, and international scholars by raising these issues as part of a diverse and widespread public dialogue. In pursuing this expectation, the book has embarked upon a path that focuses on the benefits to be harvested from protecting property rights and the ways in which this objective can be attained. It can be articulated that the book is a step forward to achieve this particular intent, and interested readers would find it worth reading. Ritsumeikan Asia Pacific University Beppu, Japan

Haruaki Deguchi

Preface

Property right is a fundamental prerequisite for economic development. An efficient structure of property rights provides actors with sufficient incentives to undertake productive efforts, whereas an inappropriately designed structure of property rights undermines economic prosperity. Despite its powerful economic implication, the institution of property rights has not been given adequate academic focus and regulatory attention, particularly in the context of developing countries. No surprise because the contemporary development theories are overly dominated by new classical ideas that take property rights for granted or not relevant to economic development. However, a historical account of developed economies shows an enormous effect of property rights on their growth trajectories. This shortcoming of the contemporary literature has been offset, to some extent, by the evolution of institutional economics. Although the contribution of institutional economics is noteworthy, the school heavily relies on ‘transaction cost’ as frictions in running our economy. Overemphasizing transaction cost diverts the focus of the model from other important elements which are also critical to property rights analysis. Political factor is the dominant one among them as far as the analysis of property rights, particularly in developing countries, is concerned. Thus, the distribution and settings of political power should be adequately stressed, which is lacking in the contemporary analysis of property rights. This lacuna in the contemporary scholarship provides us with the rationality to study the concerned issue. In line with this expectation, the book highlights the importance of property rights for economic growth in xi

xii 

PREFACE

developing countries, the reason as to why developing countries often fail to design property rights conducive to economic development, and the strategies required for designing an efficient structure of rights. The arguments of this book are sufficiently backed by evidence carefully drawn from legal lawsuits and economic analysis. Legal cases are frequently used in the property rights analysis as reference. Although the case-study method does not allow simple generalization, it does provide the benefit of richer and deeper datasets as well as allow analytical as opposed to statistical generalization. Thus, the analysis of this book is expected to contribute by presenting new information and insights critical to address the economic problems of developing countries. We further believe that the book provides a platform for further academic discussion and debate to reach a pragmatic solution for a very critical issue of economic development. Beppu, Japan July 2018

Yasushi Suzuki

Acknowledgments

Dulal thanks Professor Yasushi Suzuki for his continuous supervision and guidance in converting the thesis into an academic book. Special thanks go to A.  Mani, Jeremy Eades, Dhiman Chowdhury, and Christopher C. Nshimbi for their suggestions and comments. Also, many thanks are due to Arockiasamy Soosaimanickam, Norizan Binti Kassim, Gholamreza Chabokrow, Syed Mahbubur Rahman, Shamsudheen Arumathadathil, and Mir Ferdousi. Yasushi acknowledges with great pleasure that the valuable insight on the analysis of property rights made by his supervisor, Professor Mushtaq Khan, has been succeeded by Dulal and reflected in the theoretical framework developed in this book.

xiii

Contents

1 Introduction  1 2 Theories of Property Rights: Transaction Cost and Beyond 13 3 The Development Discourse in the Context of Bangladesh: An Analytical View 41 4 Political Origin of State Weakness 67 5 Patron-Client Politics and the Rise of the Business Class 87 6 Non-market Allocation and Rent Seeking109 7 Property Rights and Price Control131 8 Toward an Appropriate Structure of Right161 9 Conclusion187 Index191 xv

Abbreviations

ADB ADLI AL BB BCS BDT BGMEA BNP BOI BOK BRICS BRTA BTMA BTRC BTV CAAB CAR CBA CMH CMI CMLA CNG CPD DCC DIT DRP

Asian Development Bank Agricultural Demand Lead Industrialization Awami League (Bangladesh) Bangladesh Bank Bangladesh Civil Service Bangladeshi Taka Bangladesh Garment Manufacturers and Exporters Association Bangladesh Nationalist Party Board of Investment Bank of Korea Brazil, Russia, India, China, and South Africa Bangladesh Road Transport Authority Bangladesh Textile Mills Association Bangladesh Telecommunication Regulatory Commission Bangladesh Television Civil Aviation Authority of Bangladesh Civil Aviation Rules Collective Bargaining Agent Combined Military Hospital Census of Manufacturing Industries Chief Military Law Administration Compressed Natural Gas Center for Policy Dialogue Dhaka City Corporation Dhaka Improvement Trust Democratic Republican Party

xvii

xviii 

ABBREVIATIONS

DSE Dhaka Stock Exchange EPB Economic Planning Board EPZ Export Processing Zone ETV Ekushey Television FBCCI Federation for Bangladesh Chambers of Commerce and Industry GDP Gross Domestic Product GNI Gross National Income GNP Gross National Product HC High Court (The) IMF International Monetary Fund IOJ Islami Oikya Jote (Islamic Unity Alliance) JI Jamaat-e-Islami JP Jatiya Party (National Party) JSD Jatio Samajtantrik Dal (National Socialist Party) KCIA Korean Central Intelligence Agency KPI Key Point Installation LDC Least Developed Country LDP Liberal Democratic Party MITI Ministry of International Trade and Industry MOC Ministry of Communication MOF Ministry of Finance MP Member of Parliament MSB Marginal Social Benefit MSC Marginal Social Cost N-11 Next-11 Emerging Economies NAP National Awami Party NCG Neutral Caretaker Government NGV Natural Gas–run Vehicle NIE New Institutional Economics NIEs Newly Industrialized Economies NPL Non-Performing Loan PMO Prime Minister’s Office PPP Purchasing Power Parity PSC Parliamentary Standing Committee PWC PricewaterhouseCoppers PWD Public Works Department RPGCL Rupantarita Prakritik Gas Company Limited (Converted Natural Gas Company Limited) SAM Social Accounting Matrix SCB State-Owned Commercial Bank SL Student League

 ABBREVIATIONS 

SOE TIB UN VHF WB

State-Owned Enterprise Transparency International Bangladesh United Nations Very High Frequency World Bank

xix

List of Figures

Fig. 3.1 Fig. 3.2 Fig. 7.1 Fig. 7.2 Fig. 7.3 Fig. 7.4 Fig. 7.5

Composition of GDP. (Source: World Development Indicator (online version)) 44 Public investment in some selected Asian countries (in % of GDP). (Source: Constructed from Everhart and Sumlinski 2001)53 Price control and public domain 136 Welfare loss from monopoly supply of CNG vehicle 142 Price control in the natural gas market 143 Price control in the taxi-cab fare market 145 The effect of floor pricing on land transfer fee 150

xxi

List of Tables

Table 3.1 Table 3.2 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 7.1 Table 7.2 Table 7.3 Table 8.1 Table 8.2 Table 8.3

Macroeconomic indicators of Bangladesh 44 Marx’s analysis of the mode of production 59 Leading Bangladeshi business houses in 1969–70 91 Top 14 industrial houses of Bangladesh in 1988 95 Ownership of 12 privatized SOEs 98 Background of MPs 100 Top 20 loan defaulters as of June 30, 2006 (BDT in million) 102 Number of transfer deeds completed and amount of revenue collection151 Revenue collection from land transfer before implementation of floor price 152 Rate of plain land (Nal) in Cox’s Bazar Municipality 154 Nature and causes of prevailing property rights 163 Consequence of inefficient property rights on rent 165 Different combinations of state-business relations 167

xxiii

CHAPTER 1

Introduction

The right to life is the source of all rights—and the right to property is their only implementation. Without property rights, no other rights are possible. Since man has to sustain his life by his own effort, the man who has no right to the product of his effort has no means to sustain his life. (Ayan Rand 1964, p. 90)

1.1   Development Issues for Developing Countries The debate as to ‘why some countries are rich and others poor’ is not new but as old as the history of human civilization. Even though the debate has generated an extensive curiosity among scholars and policymakers since the time of Adam Smith, owing to the invention of new ways and methods of explaining economic problems and possibilities, the mystery is yet to be resolved. This is manifested by the fact that some countries have progressed economically well while others have either retrogressed or not advanced in commensuration with their potentials. Maddison (2001) reports historical growth account, which shows that in 1500, the per capita GDP of Asia, Africa, and Western offshoots amounted to 572, 414, and 400, respectively.1 While Africa and Asia have failed miserably to maintain the pace of their economic growth in the subsequent period, Western offshoots have grown rapidly. The per capita GDP of Western offshoots amounted to 9,268 in 1950, whereas the per capita GDP of Asia and Africa grew by a meager amount—to 634 and 894, respectively.

© The Author(s) 2018 M. D. Miah, Y. Suzuki, Power, Property Rights, and Economic Development, https://doi.org/10.1007/978-981-13-2763-6_1

1

2 

M. D. MIAH AND Y. SUZUKI

According to the recent GDP estimations, Asia is ahead of Africa by a good margin, but lagging far behind the Western offshoots. Not all countries in a specific geographic area are uniformly developed. Sharp differences in economic growth between two neighboring countries are apparent. For instance, some newly industrialized economies (NIEs) in Asia, such as Hong Kong, Singapore, Taiwan, and South Korea, have been able to accelerate the pace of their respective economic growth. The per capita income of those NIEs increased rapidly over the past few decades. Despite South and North Korea being neighbors, the per capita income of the former is 18 times that of the latter. Not so long ago, as late as the 1930s, the Finns and Estonians enjoyed a similar standard of living (O’Driscoll and Hoskins 2003). Despite the two countries being neighbors, the average Finn earned two and a half times the average salary of an Estonian (in 2016). Moreover, the nominal per capita GDP of the United States is more than seven times the per capita GDP of Mexico. Before unification, substantial differences in economic performance as well as standards of living prevailed between East and West Germany. Hong Kong and Singapore border their much larger and mighty neighbor, China. The real per capita GDP of Hong Kong, which was a colony of the United Kingdom, now exceeds the per capita real GDP of its mother country. Albeit its economic miracle, China’s real per capita income is about one-­ third of Taiwan’s. This disparity in economic performance has led development economists such as Richard Easterlin (1981) to ask, “Why isn’t the whole world developed?” Several schools of thoughts have emerged to answer the question. Undoubtedly, the development of the neoclassical growth theory in the mid-twentieth century is considered a major breakthrough in the field of economics. Neoclassical economists believe that the laissez-faire competition in the market would facilitate the ‘division of work’ and ‘specialization’, leading to the optimal allocation of resources. The school identifies ‘technology’ as the only force that leads to sustained and continuous increase in living standards. Despite its attempt to systematically analyze the causes and consequences of growth across countries, the theory is far from the reality. Sen (1970: 9)  argues, “[W]ith this immensely practical motivation it would have been natural for growth theory to take a fairly practical-­ oriented shape. This, however, has not happened and much of modern growth theory is concerned with rather esoteric issues. Its link with public policy is often very remote.”

 INTRODUCTION 

3

This can be attributed to many assumptions that underlie the neoclassical growth model. The critical one among them is whether or not the cost of running an economic system is zero or insignificant. In addition, the model assumes that property rights are perfect or not relevant to economic growth. In reality, as long as resources are scarce, the question of ‘who owns what’ or of ‘how property rights are assigned and enforced’ affects people’s choice of savings, investment, innovation, and thereby, economic consequence of a country. Property rights bestow on owners certain attributes in relation to an asset. Essential attributes comprise the right to consume or benefit from the use of the asset, exclude others from uncompensated use of property, right to sale, dispose, or transfer of the asset, and also the right to derive income from the asset. The value of any property, therefore, depends on the degree to which owners of an asset can enjoy these attributes. Apparently, the neoclassical growth theory has failed to recognize the importance of the structure of ‘property rights’ (De-Alessi 1983; Furubotn and Richter 2000; Nelson and Sampat 2001). Weimer (1997: 4) clarifies, “[N]eoclassically based welfare economics assumes a clear and precise allocation of private property rights to all commodities and productive assets as a precondition for the Pareto efficiency of competitive equilibriums within a market economy.” It was North and Thomas (1973: 91) who sketched a historical account of The Rise of the Western World and attributed the rise to an efficient economic organization that requires an individual’s “exclusive rights to use as he sees fit his land, labor capital and other possessions… the right to transfer his resources to another, and that property rights are so defined that no one else is either benefited or harmed by his use of his property”. They insist that economies that have been able to uphold the basic principles of market for exchange of goods and services with appropriately defined property rights are developed today. Similarly, de-Soto (2000) investigates why capitalism triumphs in the West and fails everywhere else. He argues that legal structures of property rights give the West the tools to save and invest the surplus in a productive way. However, we should ask: how can their claim be generalized? There is plenty of historical evidence which shows that the suppression of property rights is associated with lower market transaction and property value. For instance, several of the postcommunist countries placed restrictions on the sale of assets to foreign investors, which reduced not only the exchangeability of assets but also their intrinsic value (Weimer 1997). Likewise, restricting the use right of an asset attenuates the right, which is

4 

M. D. MIAH AND Y. SUZUKI

accompanied by a lower value of that property. Richardson (2005) reports that when the Zimbabwean government initiated land reforms during 2001–2003 which involved forcibly taking over white-owned land, commercial banks stopped accepting land as collateral. The combined effect of land grabbing and the attenuated use of land led to such a sharp fall in land prices that “the net loss in one year was nearly three and a half times larger than all the World Bank aid ever given to Zimbabwe” (Richardson 2005: 542–543). Similarly, any restriction on income derived from the property drives its value down. One simple mechanism of such a restriction is price control (Barzel 1997; Cheung 1979; Mills 1975). Navissi et  al. (1999) show that the equity price of New Zealand’s listed public companies was strongly negatively correlated with price controls imposed on equity values. Other such institutional barriers, including high rate of taxes on sale and costly transfer of ownership, are most likely to attenuate the right to property, and thereby, reduce property value. The institutional setting of property rights is clearly linked with ‘incentive’. Delineation of property rights and their enforcement characteristics define and specify the ways in which players (political, social, and economic organizations) will behave in a society. Institutions that do not guarantee actors about the fruits of their hard work encourage them to shirk or seek unproductive and illegal means of doing things. In contrast, an efficient set of property rights works as an incentive for individuals to put in their efforts toward a productive purpose. This postulates that the success and failure of an economy can be attributed in large part to the nature and structure of property rights. We should accumulate case studies to endorse this claim. This book aims to contribute to this postulation analyzing the nature of property rights in Bangladesh and linking it to the country’s economic performance. Bangladesh is at a crucial development stage and is considered one of the next 11 (N-11) emerging countries after BRICS. According to the projection of PricewaterhouseCoopers (PWC 2015), Bangladesh has the potential to emerge as the 29th largest economy by 2030 and 23rd by 2050 (based on purchasing power parity). The report further projects that the GDP of the country is expected to grow at 5.11 percent for the period 2014–2050, the third highest following only Nigeria (5.4 percent) and Vietnam (5.3 percent). However, PWC’s supposition that emerging economies have stronger potential growth than the advanced countries relies on the assumption that those emerging economies “continue to follow broadly growth-friendly policies”. These policies need to be identified and

 INTRODUCTION 

5

framed in such a way that the growth potential of the country is materialized. This book brings into focus one such critical policy dimension— property rights—which is considered a prerequisite for the economic growth of a country.

1.2   Analytical Approach of the Book The structure of property rights is a complex institution and has many dimensions to be discussed for a comprehensive understanding. Specially, ‘allocation’ and ‘enforcement’ of property rights are two primary attributes involved with the efficiency of the structure. As the transaction cost school argues, initial allocation does not matter if the transaction cost is zero. Since the assumption of zero transaction cost is unrealistic—and more so in the case of developing countries such as Bangladesh—initial allocation matters for the efficiency of resource distribution. Initial allocation is a judicial matter which calls for the independence of the judicial system. Judicial independence implies that the judiciary is not subject to interference by the legislators. The research relies on the case study method. A handful of cases are analyzed to examine if the allocation of scarce resources conforms to the welfare theorem. Although the case study method does not allow simple generalization, it does provide the benefit of richer and deeper datasets as well as allow an ‘analytical’ as opposed to ‘statistical’ generalization. Cases of this book comprise legal and non-legal cases. Legal cases are frequently used in the property rights analysis as reference (see, e.g. Coase 1960; Posner 2014; Cooter and Ulen 2004). Coase (1960) assumes that the initial definition of rights frequently is accomplished most efficiently through the use of the government’s organs such as courts, legislatures, and so on. Moreover, property rights is an issue that belongs to both legal and economic domains. Thus, a combination of legal and economic cases is expected to provide important insights into the efficiency of property rights prevailing in a particular society. The collected cases are then analyzed under the broader theoretical framework of new institutional and institutional political economy. The new institutional economics (NIE) is believed to be more relevant to the property rights analysis than the new classical approach. Even though the core principles of NIE have been derived from neoclassical economics, the former has successfully dropped some restrictive assumptions on which neoclassical theory is founded. The basic objective of new institutionalist

6 

M. D. MIAH AND Y. SUZUKI

proposition is to obtain greater insights into economic behavior by moving away from some of the more extreme simplifications and abstractions of the orthodox neoclassical theory (Mills 1975). As a result, the NIE provides a realistic foundation that is lacking in the established or conventional economics model. North and Thomas (1973), as referred earlier, have written from the NIE viewpoint. We, however, deviate to some extent from the standard new institutional economists’ view. Although the NIE acknowledges the role of state in allocating and enforcing property rights, the school assumes that the government or central enforcing authority is simply a neutral arbiter. Such an assumption is very restrictive and hardly resembles the reality prevalent in many developing countries. Given the role of state as the ultimate guarantor of property rights and its discretion to decide what kind of property rights and obligations it is ready to recognize and enforce, it is more likely that state would attempt to maximize its own utility. Those who run the state are human beings and self-maximizing individuals. This implies that leaders would maximize their own utility as and when there are available chances. Thus, we resort to the political economist view to describe the political structure that affects the structure of property rights. We draw upon a standard model of state-business relation advanced, among others, by Okuno-Fujiwara (1997) and Kang (2002). State-business relation results in rent (excess income) creation for some societies and rent dissipation for others. So, there must be some conditions under which such a relation produces socially beneficial results. In the absence of these conditions, the state–business relation may yield socially deleterious effects. This book examines these conditions. One of the critical determinants we have pointed out is the interaction between state and business (society, in general). Or in other words, it is the relative balance of power between them which determines a particular way of resource allocation in a society. Different combinations of balance of power between state and business produce very different structures of property rights and the resulting economic performance. We believe the case study of Bangladesh is contributing to proving the viability of the political economy approach. Bangladesh is a developing country which possesses a high potential, thanks to its natural and human resource endowments. However, the country has yet to make a discernable leap forward to change its status from a lower-middleincome country to a middle-income country. Although various elements contributing to the country’s economic growth and failure have been

 INTRODUCTION 

7

explored by the existing literature, institutional aspects have largely remained unexplored. Thus, explaining the country’s economic performance from the property rights perspective is expected to provide new information useful for policy formulation.

1.3   Structure of the Book The chapters of this book are arranged sequentially so that the book stands as a single unit. However, each chapter has its own theme and can be read independently without making reference to other chapters. Following this introduction, Chap. 2 lays the theoretical foundation of property rights. In so doing, it attempts to discuss philosophical narrations of property rights which set the baseline conditions for the contemporary analysis of property rights. In particular, the Hobbesian requirement of ‘leviathan’ or central enforcing authority, Locke’s labor theory of property, and Rousseau’s criticism of civil society where private property is the primary building block are discussed in brief. Moreover, contributions by other contemporary schools to the analysis of property rights have been discussed in this chapter. There are at least two dominant schools that have evolved to explain the emergence and efficiency of property rights. One school, which we call the mainstream view (transaction cost theory of property rights), takes the liberal approach. Such a liberal market consensus attributes the emergence of property rights to some common determinants influenced by laissez-faire market mechanisms. As such, efficiency is measured by juxtaposing a particular mode of property rights with these determinants. This school, however, is less relevant to explain the prevailing property right structure in developing countries because of its utter ignorance of political elements in modeling property rights. Thus, we recourse to the political economists’ view. Under the broader analytical framework of this approach, we identify factors that influence the ­allocation of resources. The school is of the view that political institutions play a greater role in determining what type of property rights would prevail in a society given its sociopolitical conditions. Chapter 3 discusses the economic performance of Bangladesh, shedding an analytical light on the contemporary theories of economic development. Since its independence in 1971, the country has been struggling to find a way out of the low level of equilibrium trap. Only recently, it has been able to achieve a moderate rate of GDP growth, which is much less than its real potential. National and international scholarships have

8 

M. D. MIAH AND Y. SUZUKI

attempted to address these issues with the help of various development theories. This chapter critically reviews these theories. It has been observed that the dominant theories are overly concentrated on economic subsystems or factors of production while neglecting its complementary and core institutional subsystem—the relation of production, in particular, the form of property rights. This chapter thus forwards intuitional issues to be included in the development agenda of Bangladesh. Since political institutions are crucial determinants for defining and enforcing property rights, we explain these determinants in Chap. 4. In particular, we analyze the political parties and their ideologies. In so doing, we briefly account their origins as well as historical backgrounds. We argue that the political parties are weak vis-à-vis the society. Two major political parties seek their ancestral support from almost the same base of popular vote. They differ marginally from one another in terms of the vote. Thus, it is impossible to forestall the political outcome of any parliamentary election held in a free and fair manner. This uncertainty prompts major parties to form coalitions with small political factions in a power-sharing arrangement. Such a tradition bestows these small factions with increased bargaining power over resource allocation. A long practice of this tendency has given rise to the typical patron-client politics in Bangladesh, which have a profound implication for resources distribution. Patrons provide clients with privileged access to state-sponsored properties in exchange for their support to the party. Assuming that economic actors maximize their own benefits, such a patron-client relation is an equilibrium outcome under the prevailing political institutions. Chapter 5 discusses this issue in detail in the context of Bangladesh. It has been shown that the country’s industrial policy has failed to create a broad base for the industrial sector. Some family-based conglomerates which have their roots in the British or Pakistani period are still dominating the industrial sector. In the postindependent Bangladesh, government ­nationalization policies hindered the growth of private enterprises to a great extent. Improper privatization policies, which nurtured mainly nepotism and cronyism, have failed miserably to develop a diverse industrial sector, which, in turn, has resulted in a small and concentrated business sector. Given the embedded weakness of the political parties, the business sector squeezes undue benefits out of the state’s weakness. Bank loan default cases, discussed in this chapter, show anarchy in resource distribution under an unbalanced powersharing coalition. An increased trend of businessmen joining politics further indicates the privilege enjoyed by the legislatives in resource distribution.

 INTRODUCTION 

9

When resource distribution is to be maneuvered, authority most often prefers to follow non-price allocation methods. Chapter 6 presents a few cases related to non-market allocation of state-controlled assets. It is imperative to argue that non-market allocation does not necessarily result in inefficiency if its alternative, price mechanism or market mechanism, is either absent or costly to coordinate. In contrast, if market price of the distributed resources is available, non-price method may result in inefficiency. More specifically, the actor’s deliberate choice to distribute resources in certain specific ways generates inefficiency. Evidence is provided by analyzing cases of land distribution through lottery system, allocation of television broadcasting frequency, and allocation of building permits. These cases reveal some common phenomena, such as excess competition for rent created by these non-market mechanisms, lack of credible commitment by the state to protect the right on resources once it is assigned, and inefficient structure of property rights interlocked with the basic institutions of the country. They apparently are the reasons for institutional failure. Like non-market mechanism, which often aims to redistribute resources for greater social equity, price control is effected to deliver benefits to the masses by setting the prices of certain goods or services below or above the market clearing price. However, regulators’ intention to increase social welfare by controlling price may turn into a futile attempt if all the relevant attributes that affect the price of that particular good or service cannot be perfectly delineated, which is practically infeasible. As a result, suppliers tend to economize on those attributes that are imperfectly delineated. On the other hand, buyers spent additional resources to capture a portion of the value that is left in the public domain. Under this framework, Chap. 7 presents some cases related to price control. The government of Bangladesh has fixed the price of compressed natural gas (CNG) (used as fuel for CNG-run vehicles) and the CNG-fare market. The control price, however, does not work in reality because the actual fare is determined by the bargaining process between the service providers and service users. Even with perfect implementation of this policy, service providers attempt to adjust prices through other attributes which are not legally and precisely defined. Thus, the effort put to execute price control has turned into a social waste. While the above instance is related to price cap,  Chap. 7 also discusses another case which is related to price flooring, fixing the minimum price. The government of Bangladesh has fixed the floor of land value for charging the transfer fee.

10 

M. D. MIAH AND Y. SUZUKI

For some lands, the agency decided that the floor value is much higher than the actual market value or transfer value. Thus, charging transfer fee based on the floor price instead of the market price means to put an extra burden on land transaction. Higher transaction cost tends to have a negative impact on land transfer. Data and evidence provided in this chapter show that after implementing the floor pricing system, land transactions as well as fiscal  revenue collection have reduced significantly. These are clear examples that prove that state intervention sometimes amplifies market disequilibrium condition instead of ameliorating it. While state intervention delivers socially undesirable results in Bangladesh, economic development of East Asian NIEs, however, has been achieved because of—not in spite of—state intervention. State was an integral part and essential development partner of Japan, South Korea, Taiwan, Hong Kong, and Singapore. Chapter 8 presents the critical requirements of state-led development in South Korea and Japan and offers some lessons for underdeveloped and developing economies. Korea was not a rent-free society; but rather, rent was created by enforcing selective property rights with credible commitment to those who could be development partners along with the state. A small and concentrated business sector enjoyed unprecedented privilege under the auspices of the state. However, privilege was allowed to those who were critically important for economic and strategic significance of the country. Thus, rent outcome was positive. On the other hand, a small and concentrated group contested for rents which effectively limited the rent-seeking cost. Although the majority growth period in Korea was during the reign of the military dictator, the Japanese experience is different. A civil government ruled Japan during its unprecedented economic growth period— again, with state intervention. We sketch the core elements of developmental strategy in Japan and Korea, placing special attention on state capacity, and describe the fundamental nature of government intervention that paved the way for their growth miracle. We take into consideration the fact that there is no one-size-fits-all development mantra that can be replicated overnight. However, it is also a fact that the East Asian development miracle offers valuable lessons for developing economies. We formulate policy prescription keeping both pros and cons of state-interventions in mind. Chapter 9 finally concludes by summarizing the major arguments of the book and indicates that these arguments can be useful for policy formulation at the state level. Also, the direction for future research is hinted in the concluding chapter.

 INTRODUCTION 

11

Note 1. Amount represents 1990 international dollars. Asia constitutes countries excluding Japan; Western Offshoots comprise Canada, the United States of America, New Zealand, and Australia.

References Barzel, Y. (1997). Economic Analysis of Property Rights. Cambridge: Cambridge University Press. Cheung, S. N. S. (1979). Rent Control and Housing Reconstruction: The Postwar Experience of Prewar Premises in Hong Kong. The Journal of Law & Economics, 22(11), 27–53. Coase, R. H. (1960). The Problem of Social Cost. The Journal of Law & Economics, 3, 11–44. Cooter, R., & Ulen, T. (2004). Law and Economics. Pearson Addison Wesley. De Alessi, L. (1983). Property Rights, Transaction Costs, and X-Efficiency: An Essay in Economic Theory. The American Economic Review, 73(11), 64–81. de-Soto, H. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. NY: Basic Books. Easterlin, R. A. (1981). Why Isn’t the Whole World Developed? The Journal of Economic History, 41(11), 11–19. Furubotn, E.  G., & Richter, R. (2000). Institutions and Economic Theory: The Contribution of the New Institutional Economics. An Arbor, Michigan: University of Michigan Press. Kang, D.  C. (2002). Crony Capitalism: Corruption and Development in South Korea and the Philippines. Cambridge: Cambridge University Press. Maddison, A. (2001). The World Economy: A Millennial Perspective. Development Center Studies, Organization for Economic Cooperation and Development, Paris, France. Mills, D. Q. (1975). Some Lessons of Price Controls in 1971–1973. Bell Journal of Economics, 6(11), 3–49. Navissi, F., Bowman, R. G., & Emanuel, D. M. (1999). The effect of price control regulations on firms’ equity values. Journal of Economics and Business, 51(11), 33–47. Nelson, R., & Sampat, B. N. (2001). Making sense of institutions as a factor shaping economic performance. Journal of Economic Behavior & Organization, 44(11), 31–54. North, D.  C., & Thomas, R.  P. (1973). The Rise of the Western World: A New Economic History. Cambridge: Cambridge University Press. O’Driscoll, G. P., & Hoskins, W. L. (2003). Property Rights: The Key to Economic Development. Policy Analysis, 482, 11–17.

12 

M. D. MIAH AND Y. SUZUKI

Okuno-Fujiwara, M. (1997). Toward a Comparative Institutional Analysis of the Government-Business Relation. In M.  Aoki, H.-K.  Kim, & Okuno-Fujiwara (Eds.), The Role of Government in East Asian Economic Development: Comparative Institutional Analysis (pp. 376–403). Oxford, New York: Oxford University Press. Posner, R. A. (2014). Economic Analysis of Law (9th edition). New York: Wolters Kluwer Law & Business. PricewaterhouseCoopers. (2015). The World in 2050: Will the shift in global economic power continue? Retrieved from https://www.pwc.com/gx/en/ issues/the-economy/assets/world-in-2050-february-2015.pdf on January 21, 2018. Rand, A. (1964). The virtue of selfishness: a new concept of egoism. New  York: Penguin. Richardson, C. J. (2005). The loss of property rights and the collapse of Zimbabwe. Cato Journal, 25(3), 541–565. Sen, A. (1970). Introduction. In A.  Sen (Ed.), Growth Economics (pp.  9–40). London: Penguin Books. Weimer, D. L. (1997). The Political Economy of Property Rights. In D. L. Weimer (Ed.), The Political Economy of Property Rights: Institutional Change and Credibility in the Reform of Centrally Planned Economies (pp.  11–19). Cambridge University Press.

CHAPTER 2

Theories of Property Rights: Transaction Cost and Beyond

2.1   Introduction Property rights define the rights that individuals or groups have to make decisions about the use to which specific assets may be put. They may include the right to use, to sell, to lease out, and to pass on to heirs, but usually preclude the right to use the asset in ways which explicitly hurt others. There are two basic and interrelated issues involved with the property rights analysis: right allocation and right enforcement. Each of them requires either voluntary cooperation from the non-owners of a property or a central enforcement authority. This idea of property rights has been brought to its current rigor by different branches of intellectual contribution, including philosophy, law, and economics. Following this tradition, this chapter attempts to briefly explain the salient contribution of these schools, which are essential for the analysis of property rights. We place a particular emphasis on philosophical contribution, new institutional, and institutional political economics. In the historical context, the importance of property rights was emphasized by the seventeenth-century philosophers, who were believed to have laid the basic foundation of property right analysis (Bethell 1999). Among others, Thomas Hobbes, John Locke, and Jean-Jacques Rousseau are prominent. Hobbes is important simply because his suggestion to establish a sovereign or leviathan was mainly meant to protect properties from others’ expropriation. In his realization, without the state, protection of

© The Author(s) 2018 M. D. Miah, Y. Suzuki, Power, Property Rights, and Economic Development, https://doi.org/10.1007/978-981-13-2763-6_2

13

14 

M. D. MIAH AND Y. SUZUKI

one’s property against others’ cruelty of expropriation depends on the might of the individual. Similarly, Locke provoked the most intense discussion, and controversies as well, about the idea of property. He acknowledged labor as the most sacred of all properties. Whatever men augment through their labor becomes their property, which men can preserve enough to maintain their subsistence level. In contrast, Rousseau criticized the role of civil society, which plays a guardian-like role in protecting private property. His criticism hinges on the assumption that the sovereign who rules the civil society enjoys the discretion to put his/her greed over the interest of the society. If so, the subsistence ethics proposed by Locke is in jeopardy. While we find Hobbes advocating a sovereign authority, Rousseau warns against potential injustice caused by the sovereign to the subjects. These contrasting concepts have an important implication for our analysis of property rights because without enforcing authority, property rights would be characterized by anarchy and muscle power. In addition, socially optimal allocation and enforcement of property rights require the neutrality of enforcing authority. It is interesting to note that the new institutional school recognizes the role of central authority for allocation and enforcement of rights. The school, however, assumes that the authority is simply a neutral arbiter. This assumption is self-contradictory. On the one hand, the school models the individual as utility maximizer. On the other hand, it assumes enforcing agents to be neutral. Moreover, the school does not clearly spell out the conditions under which enforcement authority can be neutral. This postulates that without analyzing the role of the state as a mediating and enforcing agent, an analysis of property rights is incomplete. In other words, an understanding of the evolution of a particular mode of property rights essentially requires an analysis of the political context under which such an evolution takes place. This aspect of property rights is rooted in the ‘institutional political’ economy. Deviating itself from the mainstream laissez-faire theory of property rights, the institutional political school argues that government surely has an influencing role in defining and enforcing rights. Government is the supplier or allocator of rights by dint of its power to define and enforce rights. As a consequence, government may seek ways in which it can benefit from a particular pattern of property rights regardless of social consequences rendered by such allocation. If the utility of the government conforms to the welfare-driven strategy of a society, value-enhancing property rights will emerge and vice versa. In this sense, an analysis of property rights from the perspective of state’s utility functions is essential.

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

15

The chapter has been structured as follows: Section 2.2 describes the philosophical foundation of property rights from the view of Hobbes, Locke, and Rousseau. Section 2.3 discusses the mainstream view and Sect. 2.4 takes the view of institutional political economy.

2.2   Philosophical Foundation The works of Aristotle evidence that he was condemning the system of communism and proposed private ownership of land while advocating common use of its products. On the contrary, Plato (1993: 462) argued communism as the guardian-class of the republic in the sense that collective ownership is critical to bring about a common interest in the aggregate benefits and to avoid social chaos or dissatisfaction that would occur “when some grieve exceedingly and others rejoice at the same happenings”. Aristotle (1988: 1263) responded by arguing that private ownership promotes virtues such as prudence and responsibility: “when everyone has a distinct interest, men will not complain of one another, and they will make more progress, because everyone will be attending to his own business”. He further argued that the pursuit of altruism might be better perceived by concentrating on the way a person exercises his rights of private property rather than questioning the institution itself. In this reflection, the relation between property and freedom is inherent in the sense that ownership ultimately makes a person free. Despite this laudable contribution and counterfactual debate, the totality of the concept of property did not flourish until the eighteenth century, when the works of Hobbes, Locke, and Rousseau shaped it into its current form. 2.2.1  Hobbes’s Leviathan and the Security of Property Thomas Hobbes, one of the most prominent seventeenth-century philosophers, described property rights from the perspective of social justice and equality. For Hobbes, the basic of all justice is the enforcement of property rights. Property rights are the elements that justify the existence of a state because there cannot be any property rights without the state. All property rights relations are, thus, enforced by the state. Hobbes’s analysis of property rights is rooted in the notion of security and peace without which men cannot strive to survive and life has no meaning. Thus, his advocacy of protection of property can be justified by

16 

M. D. MIAH AND Y. SUZUKI

comparing the nature of life in civil society vis-à-vis the state of nature. In the state of nature, life is entangled with the innate anarchy “warre of every man against every man”, a condition in which the life of man is “solitary, poore, nasty, brutish, and short” (Hobbes 2003). From this context, Hobbes argued that peace and amicability, which are human desires in this world, are only possible by graduating to a civil society simultaneously departing from the state of nature. This transformation is possible when individuals transfer their rights to the Leviathan, who can enforce his will as a law and can protect self-preservation. Hobbes (2003: 142) maintained: the whole power of prescribing the Rules, whereby every man may know, what Goods he may enjoy, and what actions he may doe, without being molested by any of his fellow Subjects: And this is it mean propriety. For before the constitution of Sovereign Power all man had right to all things: Which necessarily causeth Warre: and therefore this propriety, being necessary to peace, and depending on sovereign Power, is the Act of Power, in order to the publique peace.

Property is a piece of discord according to Hobbes, but the situation can be improved by establishing a common power which would work to defend subjects by securing their own industry, fruits of the earth with which they nourish themselves and live contentedly. Hobbes further argued that unless such great power is established, security to both life and property is in jeopardy because in the state of nature, “men observed no other Lawes, but the Lawes of Honour” (2003: 134). Honor depends on the extent to which men can protect their property from the cruelty of others. Thus, the law promulgated by the supreme authority takes the place of state of nature and every individual is bound to observe because “I Authorize and give up my Right of Governing myself… on this condition, that thou give up the right to him, and Authorise all actions in like manner” (2003: 137). Hobbes stressed that the protection of one’s life is sacred for all earthly beings. Thus, the basic human aim is the preservation of his life. In a state of nature where there is no supreme authority to impose the necessity for self-preservation, absolute sovereignty is required. In this sovereign state, individuals can only disobey the law of the leviathan if self-preservation is in danger due to any action of the sovereign. This implies that self-­ preservation is a great impulse by which men form a commonwealth and

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

17

cannot, therefore, be alienated. “For where there is no Common-wealth, there is a perpetual warre of every man against his neighbour; and therefore everything is his that getteth it, and keepeth it by force; which is neither propriety, nor community; but uncertainty” (Hobbes 2003: 196). In the state of nature, property rights are common, which result in strife and war; thus, self-preservation is insecure. Hobbes wanted sovereign to be perpetual, which means that returning to the state of nature was unwarranted. From this perspective, it can be inferred that in the state of nature, there is no private property. This leads to the conclusion that private property is in fact the creation of state. Hobbes attached the ‘excludability’ clause in the use of assets a person possesses, but also endorsed the sovereign’s rights to interfere, which subjects cannot exclude. Hobbes’s justification of the sovereign’s right to interfere leads to an important question: what restrains the sovereign’s ‘passion’ for expropriation of subjects’ property? This is where Hobbes (2003: 149) was outspoken to certify monarchy as a more appropriate form of Leviathan: In Monarchy, the private interest is the same with the publique. The riches, power, and honor of a Monarch, arise onely from the riches, strength and reputation of his subjects. For no King can be rich, nor glorious, nor secure; whose Subjects are either poore, or contemptible, or too weak through want, or dissention, to maintain a war against their enemies.”

The merit of this proposition can be derived by looking at the context of time. At that time, external threat was strong enough to force the sovereign to keep his subjects happy. However, in modern society, a benevolent autocratic regime is no less well-off than a monarchy. Thus, Hobbes’s preference of monarchy to either democracy or autocracy is no more a suitable form of leviathan because where ‘passion’ outperforms ‘reason’, there is almost no remedy against sovereign’s omni power. Moreover, in the Hobbesian state, the property on which human can establish rights is primarily restricted merely to the resources vested in the land and sea God has bestowed. It is the labor that is necessary to establish rights on those natural resources to increase their value. Since supply of labor is not abundant, Hobbes argued that human beings have rights on their own labor, which they can exchange for the nourishment of people. From this context, Hobbes maintained that the amount of those natural resources depends on the degree of labor and industry men employed to capture them.

18 

M. D. MIAH AND Y. SUZUKI

Even though Hobbes realized the importance of labor to establish rights over natural resources, a comprehensive analysis of the labor theory of property can be derived from Locke’s seminal work, Two Treatises of Government. 2.2.2  Locke’s Labor Theory of Property John Locke’s theory of property is seemingly a seminal contribution to the development of the concept of private property and is still shaping modern theories in this field. For Locke, the question of property is the problem of acquisition. This is the point that distinguishes his theory from the traditional discussion of property, which is preoccupied by twin problems: acquisition and use (McKeon 1938). Stevens (1996), however, states that Locke’s use of property is similar to its use by the Levellers and others in the seventeenth century. In the same token, Day (1966: 219) argues, “Locke’s justification of private property did not originate with him. The alleged right of self-ownership, which is the foundation of his theory, is asserted for instance in the Leveller R.  Overton’s An Arrow against all Tyrants”. Still, most scholars agree that Locke’s theory of property resembles those of many modern philosophers, including Nozick (2013). Macpherson (1978) contends that the Lockean view of private property is to justify the early modern capitalism and to legitimate a basis for a society where political and economic rights are to be allocated. In contrast, Waldron (1990) refers to Tully, saying that far from providing a legitimate excuse for capitalism, Locke intrinsically denies that there is any private property in the state of nature; but rather, he emphasized the plausibility that private property emerges only in civil societies. The basic premise of the Lockean theory of property is that human beings have natural rights on resources God has given to mankind. This natural right, however, is to be acquired by dint of human actions and transactions undertaken by their own initiatives. These natural rights, along with the ‘rights to preserve themselves’, constitute the grounds for further natural rights to property in common (Sreenivasan 1995). The labor each person possesses is the core property, which is the foundation for furthering rights. Whenever men mix their labor with something nature has bestowed on them, the basic metaphors of those resources transform into a new identity because they have removed it by labor, and therefore, the right over that property belongs to them. Locke believed

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

19

that the resources that nature has given us carry less value unless human hands transform them into more valuable resources. Thus, a person who has added value should be rewarded for his efforts in creating value to nature. For Locke, those who have aspiration and have accepted the pain of employing their labor to multiple the fruits of natural endowments are entitled to derive comfort and enjoyment. They acquire the liberty to enjoy and use the accumulations. Their labor has attained them liberty by virtue of which appropriation is validated. The use of labor to separate common property is also the means by which the allocation of natural resources takes place. Locke (1988: 26) stated, “[B]eing given for the use of Men, there must of necessity be a means to appropriate them some way or other before they can be no use.” Thus, if mankind does not appropriate them for their convenience and comfort, resources will ultimately be worthless. A natural resource cannot be made of any use unless it is appropriated to the exclusive use of one particular individual. By annexing labor to natural resources, people acquire allocative rights over resources. This is what characterizes Locke’s ‘law of nature’. Even if positive laws are formulated for allocation of common resources in civil society, the law of nature is no less important. For example, resources in the ocean are still allocated by the way people employ their labor to segregate some from the common resources, which resembles the law of nature. For the law of nature, Locke marked the limit of expropriation to subsistence ethics, which prohibits piling up resources. Locke proposed that people should segregate common pool resources only if the resources held privately yield superior utility compared to the state of nature. Second, the appropriation of any portion of resources is to be confined by the judgment that there is still enough and as good left for those yet not provided for. Locke made it explicit that the right to subsistence actually forms the moral basis of private property. However, mankind can hoard some parts of their present private possession for future use if doing so would not compromise the superior utility of resources. Locke believed that present savings by an individual will entail him not to appropriate in the future. This leaves others to have more claim on the remaining resources. This led Locke to conclude that societies where most resources are appropriated privately are more prosperous, at least economically, than societies where they are not. The institution of private property in the state of nature is the only means by which the maximum level of welfare can be attained. Establishing this institution is essential not only for the ability of human agents to live

20 

M. D. MIAH AND Y. SUZUKI

but also for their prosperity (Kramer 2004). The individual’s tendency is to exert full care and toil when he expects to reap the full benefits from his labor. Thus, private property is the best strategy for creating incentives for people to bring the highest level of efforts. 2.2.3  Rousseau’s Moral Criticism Against Bourgeois Property Rights It is about 60 years after Locke that we find Rousseau, who can be considered a true founder of private property. However, his perception about the origin and purpose of private property is different from that of Locke. It is true that Rousseau was influenced by Locke; however, Rousseau is arguably pessimistic about nascent society or civil society. His notable pessimistic view cements the perception that human beings are happier in the ‘state of nature’ than in so-called civil society, where right over private property is one of the building blocks. Two other institutions of private property that contribute to the emergence of civil society are the division of labor and exchange. Since right to property is instituted to facilitate exchange, property right is, thus, the cornerstone of civil society as well as supreme among all determinants. These institutions create moral and political inequality in society. Rousseau argued that in a true sense, nothing is more peaceful than man in the primitive state, and he quotes from Locke, saying, “[w]here there is no property, there is no injury”. The state of nature treats all men equally, and ultimately, buries the hatred, vices, and servitudes. Rousseau’s thesis, however, is not in opposition to the arrangement of private property. Cassirer and Gay (1954) claim that the communistic idea was not developed anywhere in Rousseau’s works. Rather, his anger was aimed at the way in which civil society advocates the institution of private property. Rousseau understood that although private property means the abolition of the state of nature, actual prosperity without this institution is unattainable because abolition of private property means demolishing incentives. Rousseau argued that the basic foundation of civil society is the beginning of agriculture. This phase of the first revolution of civil society was marked by the division of land and labor, which required exchange. Unlike the state of nature, people put a lot of effort and accept a lot of toil for cultivation in a civil society. As such, some arrangement must be there to guarantee each to have the fruits of his labor. The most viable arrange-

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

21

ment is to mechanize property rights. Rousseau (1993: 63) noted, “How could such a situation induce man to cultivate the land, until it was regularly parceled out among them?” Thus, according to Rousseau, the introduction of agriculture led to some sort of arrangement of property, government, and law. In a civil society, men do not care only about the quantity of their possession and the power to serve or to injure; they desire also the beauty, strength, skill, merit, or talents. This creates a competition among people, which, in turn, leads them to become self-centered, forgetting the goodness of others. An individual promises to favor others so long as he receives the reciprocal or more benefits in exchange for his favor. At the same time, he hates those whom he cannot gain from or who are talented or superior to him. Unlike the state of nature, where life is full of benevolence and equality, jealousy runs everywhere in civil society. Of course, some individuals still try to be benevolent. But in most cases, benevolence will be used as a pretense for personal gain. All these evils are, according to Rousseau (1984: 119), “the main effects of property and the inseparable consequences of nascent inequality”. The agricultural society will advance to a new stage of development, which can be measured by the wealth, consisting mainly of lands and livestock, though limited in supply. This situation prompts people to expropriate others for increasing their net wealth. As expropriation begins and continues for some time, some become landless and poor. Their weakness prevents them from acquiring any wealth for themselves which, in turn, will oblige them to receive their subsistence from the rich. This situation ultimately paves the way for domination and servitude or violence and robbery. The strongest will regard their might as a superior quality whereas the most wretched will regard their needs as right to the possessions of the richest. This imbalance creates a permanent tension in the society between the rich and the poor, which results in a terrible disorder. Therefore, a sort of umpire who can secure liberty and property as a legitimized enforcement authority is required. However, the umpire might be lenient to the interest of the dominant group. If so, the new form of governance does not bring any good to the society; but rather, it is a way to justify what was previously considered unjust. Rousseau (1984: 122) stated: Such was… the origin of society and of laws, which put new fetters on the weak and gave new powers to the rich, which irretrievably destroyed natural

22 

M. D. MIAH AND Y. SUZUKI

liberty, established for all time the law of property and inequality, transformed adroit usurpation into irrevocable right, and for the benefit of a few ambitious men subjected the human race thenceforth to labor, servitude and misery.

He classifies the progress of inequality into three degrees. The first revolution is marked by the establishment of law and the right of property, and hence, the beginning of the first degree of inequality. This is followed by the second level of inequality in which the institution of magistrates will be established. Finally, the third phase of inequality can be characterized by the transformation of the magistrate into arbitrary power. This means that the law is enacted to safeguard the private property, but at the same time, private property can be appropriated by the benefits of law. Even though Rousseau’s criticism against civil society is a clear contrast with the views of Hobbes and Locke, we find an apparent similarity among them. They are concerned about how to drive anarchy, hatred, and servitude away from society. For Hobbes and Locke, self-preservation is best safeguarded in civil society under a supreme authority, whereas Rousseau feared that the supreme authority itself might cause more social diseases instead of curing them. However, natural law is unlikely to prevent individual greed better than civil law. This debate occupies the dominant position in the property right analysis of both new institutional and institutional political thoughts.

2.3   New Institutionalists’ View of Property Rights The contemporary theories or the new institutionalists’ views of property rights are founded on ideologies that are somewhat different from the concept developed by Hobbes, Locke, and Rousseau. The school is of the view that economic efficiency would facilitate the evolution, and their eventual survival, of a particular mode of property rights in a society. In other words, the existing mode of property right is the one that is more efficient. Transaction cost theory is the most influential among the contemporary theories that bestow analytical precision on the theory of property rights. 2.3.1   Transaction Cost Theory of Property Rights The transaction cost theory attempts to answer some basic but specific questions that are the epicenter of property rights analysis. For example, Coase (1960) explains why initial allocation does not matter for efficiency.

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

23

On the other hand, Demsetz (1967) illuminates what facilitates the emergence of property rights or change in the existing rights. Needless to say, these questions are at the heart of property rights analysis. Although the analytical methods, forms, and techniques are different in different schools, the basic question is one: who should own what rights? Resource allocation is efficient if the owner of a particular asset can derive utility more than anyone else in the society. Conversely, if a non-­owner values a property more than the incumbent because the former can receive more utility from the use of the property than the latter, resources are inefficiently allocated. But it will not cause harm if two conditions are met: rights are well-defined, which means that all the attributes of that asset are perfectly specified ex ante and transaction is costless. According to Coase Theorem, initial allocation does not matter even if it is not well-­defined as long as the transaction cost is zero. Coase (1960) clarifies the logic through an example. There are two pieces of land adjacent to each other; one is owned by a farmer for crop production and the other by a rancher for meat production. Suppose their activities produce some externalities. For instance, an increase of cattle in the herd may destroy crops of the neighboring farm. Additional meat production is the expected gain from increased cattle that imposes negative externality to the farmer by decreasing (destroying) crop production. In this circumstance, if initial right is assigned to the rancher, it is the farmer who should offer compensation to the rancher for not increasing cattle. The farmer would offer an amount less than or equivalent to the crop loss caused by an increase of cattle in the herd. The rancher would accept the offer as long as the amount of compensation amounts to no less than an amount gained from increasing the meat from additional cattle. In this simplified example, it does not matter whether the initial right is owned by the rancher or the farmer. Through the process of market transaction, the parties involved reach an agreement in which rights will be acquired by those who value the property most. This simplistic view turns into a complex one if we introduce transaction costs. Transaction cost comprises the cost of searching for the affected parties, negotiating among them, writing a contract, monitoring parties to stay up to the spirit of the contract, and also, any ex post cost of dispute resolution. In reality, the cost of transaction is not zero. Thus, resource allocation may not be the one that maximizes social utility, given positive transaction costs. In other words, a higher transaction cost prohibits the emergence of an efficient structure of property rights. Transaction cost theory has been applied to many branches of the economy. Theorizing firms is one popular among them. In a costless world the

24 

M. D. MIAH AND Y. SUZUKI

existence of the firm is irrelevant (Coase 1937; Williamson 1979). Williamson (1979: 233) argues, “[I]f transaction costs are negligible, the organization of economic activity is irrelevant, since any advantages one mode of organization appears to hold over others will simply be eliminated by costless contracting.” Thus, the vertical integration of a firm is justified where the cost of arranging a transaction in the market is higher than the cost of arranging the same transaction within the firm (Arrow 1970). In this sense, the existence of a firm as an alternative to the price mechanism can be attributed to the costliness of market transaction. Cheung (1983) further extends the transaction cost theory of the firm. He states that a transaction in a firm is involved with factors of production, whereas the market transactions are related to products or commodities. An extension of a firm implies that product markets are superseded by the factor markets. In a cooperative form of organization, input owners agree to render considerable use power of his input to an organizer. This is because the input owner expects more gain from cooperation than his other option, being independent (Cheung 1983). The gain in income in the cooperative mode of production is derived through economizing transaction cost. The most obvious cost of organizing through the price mechanism is to discover what the relevant prices are. If input owners, instead of joining in a cooperative team, contribute separately to produce a commodity, all contributions of input owners as well as the services of the coordinator should be priced separately and the final goods sold to customers by measuring directly various attributes related to each contribution. If so, product market and factors market coincide. However, according to Cheung, the task is difficult because the number of transactions would be enormous. Consumers lack detailed information on the contribution of each input to a commodity. It is unnecessary to discover the price in the case of cooperative behavior of the input owners. Thus, a cooperative mode of production reduces transaction cost. Hence the concept of firm emerges. The  transaction cost explanation of property rights is persuasive. However, the model does not explicitly state any solution to reduce transaction cost. Another mainstream theory of property rights, the residual right explanation, casts light on how to reduce the cost of transaction. 2.3.2  The Residual Ownership as Property Right Barzel (1997), and Milgrom and Roberts (1992) extend the Coase theorem. They identify the causes of transaction cost and its effect on property rights. As stated earlier, in the presence of high transaction costs, some

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

25

effects of rights cannot be taken into account (externality). In a hypothetical firm, there may be different input owners having a contractual agreement between them for their respective shares of input to be employed as well as output to be divided. Aggregate benefits are maximized from this cooperation if the output generated can be divided among input owners exactly corresponding to their input employed. However, the possibility of such a precise allocation is infeasible because no contract can precisely specify the contracting terms unambiguously. Thus, contracts are necessarily incomplete (Milgrom and Roberts 1992). The implication of incomplete contracts is that some attributes of a property remain unspecified and these attributes are placed in the public domain. If so, an input owner can be benefited by imposing his own costs on others, which cannot be detected without incurring costs. Thus, the property value will be undermined. Milgrom and Roberts (1992) propose residual right explanation to solve this problem. The basic tenet of the explanation is that the value of a particular property is maximized if the return right of that property is given to a person who affects the average outcome of that property most. Since the person is the residual recipient (after paying all other parties from the property’s income) and he causes the variation in return, it is irrelevant to write a precise and complete contract. Moreover, it avoids incurring additional cost of monitoring because there is no mismatch between the share of input employed and the output received by each input owner. If so, transaction costs are reduced, and the most efficient form of property rights would have emerged (Alchian and Demsetz 1973; Barzel 1997; Milgrom and Roberts 1992). Barzel (1997: 9) argues, “[M]aking the person who can affect the flow bear full responsibility for his or her actions ensures that ownership becomes secure.” Since the cost of acquiring information would be much lower once rights are assigned and the assessment of the effects would be much easier, delineation of property rights would automatically lead to reduction in the transaction cost. 2.3.3  Critics of the New Institutional View We concur with the new institutional theory that higher costs of transaction prohibit many value-enhancing market activities. However, we depart from this school on the question as to what causes inefficiency in resource allocation. Transaction cost as a source of inefficiency is only a secondary matter. For instance, if the right is assigned initially to the party who values it most, market transaction is unwarranted. Thus, transaction cost does

26 

M. D. MIAH AND Y. SUZUKI

not come to the scene (of course, subsequent activities may require the exchange of rights). It matters only when initial allocation is given to someone who does not value the property most. While the mainstream theory recognizes the importance of transaction cost, it does not however, offer any explanation as to why initial allocation can be such that does not lead to Pareto efficiency. For the transaction cost theory, initial allocation is a judicial matter. The theory assumes that legal delimitation of property rights makes economic sense (Coase 1960). This is, however, a very restricted assumption. The model assumes that the distribution and enforcement of rights are exogenous as well as the philanthropic activities of the state. This is a sort of paradox. On the one hand, individual human beings as economic agents are utility maximizers whereas the same human beings as state apparatus are neutral arbiters who enforce property rights merely for the sake of social well-being. Human philanthropic sentiments are to be respected and appreciated. However, generalizing this attribute to all human beings is very restrictive and does not conform to reality. If we assume utility maximizing individuals, we have to accept the notion that enforcing authority (government) is also a utility maximizing unit like any other agent in society (Anderson and Hill 1975; De Alessi 1983; McChesney 2003). Because of its superior power, government can change property rights that may not necessarily bring fortunes for the society, but such definition of property rights benefits some interest groups on which government relies for its power-sharing coalition. The motivation for government to act as a self-utility maximizing entity can be derived from the reciprocal relationship portrayed in the Coase theorem. Coase (1960) argues, “[W]e are dealing with a problem of a reciprocal nature. To avoid the harm to B would inflict harm on A. The real question that has to be decided is: should A be allowed to harm B or should B be allowed to harm A? The problem is to avoid the more serious harm.” Let us say, we are avoiding harm on A (for social benefit). In so doing, we are imposing harm on B, who will naturally be tempted to avoid this harm, if possible. As a rational profit maximizer, B is ready to spend any amount less than or equivalent to the amount of harm he can avoid. If B spends resources to avoid harm by manipulating initial allocation to his favor, social loss is unavoidable and maximum. Moreover, in an uncertain environment where neither A nor B precisely knows who would be endowed with the initial right, both will contest to avoid their respective harms. Society is doomed to lose in these circumstances even if more harm is avoided (by awarding rights to A). The situation is further exacerbated

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

27

by the increased number of participants in the contest. Even if A wins the race, it is still a negative-sum game for the society. In the Hobbesian analysis, it is indicated that the interacting parties to a negotiation might exercise their worst threats against each other while bargaining. In such a circumstance, removal of welfare distortion requires some sort of third party. While the mainstream analysis relies on transaction cost as a source of inefficiency in property rights allocation, the Hobbesian view attributes the reason of inefficiency to the absence of a sort of enforcing authority. Moreover, Coase’s central thesis that transaction cost is the only reason for externality to exist has recently been challenged by Demsetz (2003). For Demsetz, whether externality may or may not exist depends on aspects other than the transaction costs. Demsetz (2003) notes that even in the absence of externality, changes in property rights can take place. For example, if a single owner owns and initiates cultivation and ranching in the Coase example, no externality exists. A single owner can find an optimal mix of meat and crop production, which maximizes his total benefits. But the problem arises if undertaking both activities by a single owner generates some costs from lost specialization. Or in other words, there are costs of foregone specialization. It may be the case that a single owner can be less efficient if both activities are organized by him than if they are organized by two different individuals. If the cost of lost specialization is lower than the transaction cost between the rancher and the farmer, single ­ownership would be the optimum structure of property rights. Thus, even though the cost of transacting among the parties is positive, no externality exits. Demsetz (2003: 287) states, “[S]eparate ownership is used when it allows for a better accommodation of costly interactions than is possible if multiple parcels are managed by a single owner. It follows from this that as there is no externality if ownership is unified, that there is no externality if separate ownership is the chosen ownership arrangement.” This postulates that Demsetz sees the externality problem as merely subsidiary to more fundamental issues involving ownership or rights: ‘… the optimal ownership rearrangement not only economizes on transaction cost, but that it essentially undermines the very existence of the externality problem” (2003: 286). Similarly, the residual right explanation is persuasive; however, its ­success depends on some important qualifications. The first question is: who selects the residual claimants? According to the residual-right model, the process is spontaneous. Market forces automatically lead the rights

28 

M. D. MIAH AND Y. SUZUKI

to be held by a person who can use them best. Moreover, transaction cost argument and the residual right explanation lead us to a paradox. Coase argues that the emergence of the most efficient form of property rights is not possible due to high transaction cost; the residual-right model, on the other hand, proposes that the transaction cost is reduced (avoided) as a result of the emergence of the most efficient form of property rights. The cost minimizing standard in the transaction cost theory cannot resolve this cause-effect puzzle (a sort of chicken-egg problem). Furthermore, the functionalist model attributes the variability of output merely to internal forces such as shirking behavior of input owners due to incomplete contracting. However, political forces, which have an overwhelming influence on output variability in most cases of property rights allocation, have remained unexplored. Politics, most often than not, is placed at the center of state’s decision, including allocation of rights (redistribution, for example). In this sense, any prescribed model that excludes political forces in explaining the efficiency issue of property rights might not be compatible with the welfare enhancing hypothesis, and also deserves restricted applicability. This is the message of the institutional political economists.

2.4   The Institutional Political View While the mainstream theory attributes the inefficiency in resource allocation to the presence of high transaction cost, the political economists argue that the problem of property rights is not merely a matter of transaction cost but also the political settlement of a given society. Thus, a theory of property rights cannot be truly complete without a theory of the state (Furubotn and Pejovich 1972). Eggertsson (1990) refers to the functionalist theory as naïve because it seeks to explain the development of property rights without explicitly modeling social and political institutions. McChesney (2003: 230), however, finds a remedy to correct the mainstream model upon spontaneous or voluntary changes: To describe the fundamental model as naïve is in one sense accurate. But the accusation of naivete is unjust in another sense. With slight expansion, the basic model permits integrating the possibility of beneficial government role in defining property rights. This explicitly indicates that the mainstream view can successfully avoid its label of ‘naivete’ by including government as an important variable in the modeling of property rights.

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

29

The existence of some form of government is essential for individual property rights to emerge and sustain. Riker and Sened (1991: 953) rightly argue, “[I]n real economic activity, which is embedded in political activity, law and government has much to do with the origin of property rights.” Once we assume utility maximizing individuals in the theory of emergence of property rights, we have to note that government is also a utility maximizer like any other agent in society. Thus, a theory of property rights must describe the strategic behavior of individual agents of society vis-à-vis the institutions that characterize the polity in which they live (Sened 1997). For instance, common pool resources may turn into private property not because this transformation is socially optimal but because agents who have a strong influence on government may turn the political decision into their favor. State can allocate resources as well as protect them. Stiglitz (1994) argues that the decision to establish private rights on state property in most developing countries is strongly influenced by interest groups rather than economic viability. Empirical evidences are plenty which show that the transformation of property rights is a product of the interaction between state and society. State rulers create or manipulate political institutions to pursue their own goals. Individuals in societies compete within the shadow of those institutions to secure a privileged share of society’s resources. Combined actions of these two groups determine both the structure of property rights and the degree to which rights are efficiently allocated. This situation is stylized in the economic literature as ‘interest group theory’ (Eggertsson 1990), ‘theory of vested interest group’ (Krusell and Ríos-Rull 1996), or more broadly, ‘theory of rent seeking’ (Khan 2000; Krueger 1974; Tullock 1989). Rent is an ‘excess income’ which, in the neoclassical economic theory, should not exist in a competitive market. Rent seeking, on the other hand, is the process through which rents are created and maintained (Khan 2000). Academic discussion of rent seeking has been triggered by the pioneering work of Tullock (1967), which shows that society suffers from unproductive use of resources because resources are spent in quest of seeking undue favor for income redistribution. Rents can arise from government restrictions on various institutions of market economy, such as restriction on imports for which licenses have been issued or any other special privileges granted to some randomly selected groups or maneuvering groups. Krueger (1974) analyzes the welfare loss to the society resulting from these sorts of government restrictions. She estimated that the

30 

M. D. MIAH AND Y. SUZUKI

total value of rent dissipation accounted for 7.3 percent of national income for India and 15 percent of GNP for Turkey. These early models consider rent seeking merely as a waste of resources in the pursuit of unearned profit or wages (Congleton 2015). However, the real cost of rent should account for the opportunity loss of alternative uses of resources devoted to rent seeking (Congleton et al. 2008). Rent seeking mostly stems from government intervention in allocating and changing property rights. Principal actors of political market rent seeking can be the legislator, interest group, voters, the media, and the bureaucrats (Tullock 2005). Legislators are mainly the suppliers of rents whereas special interest groups are the demanders on which politicians are modeled as the mediators or brokers of such wealth transfer. Legislators can respond through formulating new legislation, if necessary, or modifying the existing one for an increased demand for new structure of property rights (Benson 1989). Moreover, bureaucrats play an important role in creating and maintaining rents. They can do so by using their status as small, privileged, and homogenous groups. The standard rent-seeking model, described earlier, attributes the inefficient interlocking structure of property rights to rent seeking resulting from state intervention. The model further argues that a shift toward laissez-­faire system is believed to reduce the incidence of rent seeking and institutional decay (Congleton et al. 2008). However, the model falls into the crisis of empirical validity. For instance, Khan (2000) shows that rent seeking was pervasive during Asia’s high-growth period. East Asia’s miraculous growth period is modeled after the ‘developmental state’ (Amsden 1992), which can be defined as “the seamless web of political, bureaucratic, and moneyed influences that structures economic life” (Woo-­ Cumings 1999: 1). South Korea is a key example of a developmental state. Kang (2002b) characterizes the postindependent South Korea as a state of ‘crony capitalism’ in which corruption was rampant, and business and political elites wrestled with each other over who would materialize the rent first. Krueger (2002) maintains that in South Korea, economic entitlements have arisen by enabling the cronies to receive privileged access to governmental favors that have economic value. Thus, rent creation played a critical role in facilitating big business to grow up and become internationally competitive. Similarly, rent seeking was pervasive in Thailand during the postwar period and in Indonesia during the Suharto era (Doner and Ramsay 2000). Both recorded more than average GDP growth during that time.

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

31

In contrast, many countries have failed economically due to negative rent effect. Indian evidence in the 1960s and 1970s suggests a very high rent-seeking cost with its detrimental effect on the economy (Bardhan 1999). Similar evidence is still prevalent in many Asian countries. The Philippines has a public image of cronyism, corruption, and the resultant high rent seeking (Kang 2002b). Despite its high economic potential, the country is still staggering with the low level of equilibrium trap. Similarly, Haber (2002) notes that crony arrangements in Latin America have been a fundamental feature of the economy. In the case of Mexico, Tornell (2002) explains that the economy was engulfed by systematic corruption and cronyism before the country was finally opened to rest of the world through a costly reform in 1989. The reform was facilitated by the economic crisis, which was basically the result of negative rent outcome of the country’s long-sustained cronyism. The above evidence postulates that the effect of rent seeking in a particular country hinges on other complementary institutions. Thus, an extensive analysis on the determinants of rent-seeking input and output is required. The input of rent seeking is the cost of resource spent to avail of any rent opportunity, which may take a variety of forms, including ­expenditures on corruption, bribery, and political contributions (Khan 2000). However, the magnitude of these costs varies across countries. For instance, rent-seeking cost increases as the competition for rent increases because many competing parties will aspire to capture rents for which they intend to devote resources. Since some contestants are to be excluded from this process due to limited availability of resources, excluded groups attempt to impose high rent-seeking costs on others. The degree of cost imposed on others, however, depends on the political bargaining power they possess. For proper understanding of the determinants of political contest for rent seeking, Shleifer and Vishny (1993) draw two stylized models of the market for government regulatory goods: one highly centralized power and the other much less so. In a state of centralized power, the national political leadership exercises necessary control as well as effectively monitors the relevant regulatory agencies. As a result, the political leadership is able to control the cooperative organs and those who are producing complementary goods. Society is better off in this state of rent seeking because the buyers of such political goods are assured that their rights are secured. In contrast, in a state where the political control is weaker as well as less concentrated, there are multiple monopolists selling independently their

32 

M. D. MIAH AND Y. SUZUKI

complementary political goods. Capitalizing on this weak political leadership, which is unable to exert effective power on bureaucratic agencies, officials seek to maximize their own benefits by acting as independent monopolists in selling property rights. The striking feature of this state is that those purchasing political goods cannot be guaranteed that the rights they have acquired from an independent monopolist will not be threatened by other monopolists. This lack of assurance invites many competing agents to lobby for manipulating decisions to their favor. Rent-seeking cost increases as a result, and the net rent outcome is welfare-reducing. The above discussion postulates the ‘net outcome’ of rent seeking is determined by the capacity of a state. Acemoglu (2005) identifies the essential features of politically strong and weak states. He contends that a state is strong if it can squeeze the society, collect more taxes, and state apparatus can be controlled by a self-interested ruler. In contrast, a weak state is a state where political rulers can be ousted, and the state has limited capacity to tax and regulate. Both strong and weak states can create distortions in the structure of rights. In a state which is excessively strong, the ruler has the discretion to expropriate private property by imposing high taxes or through other regulatory and non-regulatory mechanisms for personal empire building. On the other hand, a weak state cannot enforce property rights and is also unable to extract rents in the future, which results in underinvestment in public goods. State capacity requires strength of administration, judiciary, and bureaucracy. Legislators should have the capacity to formulate an accurate model which would be implemented and enforced by administration. Any ex post conflicts or deviation from the rule of the game by firms should be resolved by the judiciary in such a way that it ensures social welfare. This requires not only the practice of meritocracy but the balance of power between them. Fine-tuning balance ensures checks and balances so that any specific branch cannot overwhelm the others. Severe competition among the critical branches of the state leaves narrow room for incumbents to maximize their rents by making incoherence policy. Moreover, any attempt to install inefficient structure of rights by any single branch is easily detected and eliminated by the other administrative bodies. Such a state is characterized in the literature as ‘limited government’ (Acemoglu 2005; Haber et  al. 2003; Kelman 1983). Another form of a strong state is the state having control of all of these critical branches (judiciary, executives) by any single authority, which means that the leader is the sole powerful authority (authoritative government).

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

33

In such a case, the leader possesses the capability to squeeze the society and becomes a predator if the society is fragmented and weak.1 Such a state is called a ‘predatory state’ and is characterized by the preoccupation with ‘rent seeking’ and corruption (Evans 2012). Political classes turn the rest of the society into their prey because the state apparatus is held by a small group of personally connected individuals and the top-level leader destroys any possibility of rule-governed behavior in the lower levels of bureaucracy, giving individual maximization free rein (Evans 2012). The other side of the coin is a ‘weak state’. Contrasting to the strong state, there is no sole authority or agent possessing omni power to squeeze the society. Political leaders can be easily ousted, sometimes by the threat of military leaders or other strong social or economic blocks. This kind of government is uncertain about their future private gains. This provides them very little impetus to undertake and promote institutional change that will facilitate long-term economic growth. States’ incapacity in many third world countries is further exacerbated by their legitimacy crisis. State legitimacy can be realized through various means, such as legitimacy earned through a long practice of statehood and also by international acceptance (Migdal 1988). Most third world countries are newly liberated from their colonial prowess. They have not been able to pass a significant phase of statehood. As a result, state’s power to act according to the spirit of constitution is waned by its quest for legitimacy. Political control is weak and less centralized, which is associated with pervasive rent seeking because political leadership cannot effectively exercise controlling power on prospective rent-seekers. In the context of African and Asian politics, scholars view that the main barrier to economic development is not that the states possess strong regulatory power, but rather, their inability to dominate and extract resources from the society (Herbst 2014). When the business sector is concentrated, and the state is weak, bottom-up rent seeking is the ultimate result. Here rents created by the state flow to business because the latter has colonized the former and transformed the state into a sort of ‘executive committee’ (Kang 2002a). A business sector composed of strong interest groups may overwhelm the state with its various demands, leading to either policy incoherence or policy indecision. Analysts of developing countries emphasize that the state is relatively recent, and hence, weak. Strong interest groups attempt to capture control of the state and use the power of the state for their own benefits. Such a state we call ‘captive state’.2

34 

M. D. MIAH AND Y. SUZUKI

State tries to cope with this threat by simply allocating rights on various state properties. As a consequence, state’s policy is likely to be incoherent to the developmental path. As Migdal (1988: 240) argues, “the politics of survival at the apex of weak states has tremendously diminished the coherence of the state, its accountability, and control.” Most developing countries are newborn states in terms of their political history. Political competition is organized by prominent individuals, to whom citizens are drawn by ties of personal loyalty, or most commonly by distributing resources (Khan 1995). Since available resources to be distributed are less than the demand, competitors incur transaction cost, including lobbying cost to increase their likelihood of receiving a share. The economy faces two-pronged problems as a result: inefficient allocation of resources, on the one hand, and excessive cost of rent seeking, on the other. Both effects combined lead a country to gradual decay or economic stagnation.

2.5   Conclusion The structure of property rights provides incentive for economic agents to undertake certain actions conducive for economic progress of societies. However, in the neoclassical growth model, property rights are either taken for granted or do not matter for economic performance. This is, indeed, an intellectual vacuum, specially for explaining economic backwardness across countries. Coase fills the void to a good extent by forwarding a very fundamental argument of why an inefficient structure of property right exists. In the perspective of the Coase theorem, the persistence of inefficient property rights can be attributed to the existence of high transaction cost. The dynamic aspect of the theory is that given the costless transaction, property will be held by those who value it most. But transaction is not costless. As a result, internalizing of externality to the full extent is not feasible. To tackle this problem, the residual right explanation emerges to argue that given the positive transaction cost, rights arrangement will be efficient if the person who affects the outcome of a property most can be given the residual right on that property. This is the way how monitoring cost as well as the cost of complete contracting can be avoided. However, these new institutional models overemphasize on transaction cost and neglect other critical determinants of property rights. If transaction cost is the only obstacle to the process of property rights, we would expect more uniform nature of resource allocation. Institutions or humanly devised constraints would have very little role to play in influencing the

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

35

economic performance of countries. In line with this tradition, the institutional political school argues that variability in resource allocation can be attributed to factors other than those identified by the transaction cost model. The cost-minimization standard in the transaction-cost theory is often misleading due to formal external constraints such as the interests (or intentional design) of the state. This school doubts the new institutional assumption such that institutional change is largely driven by ­individual voluntary bargaining where gainers compensate losers, leading to the growth-enhancing structure of property rights. Protection of property rights is not an economic good like any other goods. Stable property rights require enforcement agencies possessing a monopoly power over the production of extreme means of violence, which allows them to use force when duty-bearers show disrespect for right-­ holders’ claims over the legitimate  content of the right. Government, being a legitimate enforcing authority, can consider its own utility in the creation and maintaining of property rights. Transaction cost theory clearly overlooks those factors. Unless these factors are taken into account, the analysis of property rights is less compatible with the reality.

Notes 1. Fragmented society in this case means that society cannot create effective resistance against the state by forming interest groups to restrict state’s expropriating capability. 2. The term ‘captive state’ is used by George Monbiot (2001) in the context of Britain to mean that the state is no longer the initiator of policy, but an increasingly helpless bystander as institutional corruption strikes at the heart of public life. In our case, we use the term in somewhat similar fashion, but to indicate a state where the state is held hostage by powerful groups turning the relation (state-business) to the breeding ground of rent seeking and corruption.

References Acemoglu, D. (2005). Politics and economics in weak and strong states. Journal of Monetary Economics, 52(7), 1199–1226. https://doi.org/10.1016/j. jmoneco.2005.05.001 Alchian, A. A., & Demsetz, H. (1973). The Property Right Paradigm. The Journal of Economic History, 33(1), 16–27. Amsden, A. H. (1992). Asia’s Next Giant: South Korea and Late Industrialization. Oxford: Oxford University Press.

36 

M. D. MIAH AND Y. SUZUKI

Anderson, T. L., & Hill, P. J. (1975). The Evolution of Property Rights: A Study of the American West. The Journal of Law & Economics, 18(1), 163–179. Aristotle. (1988). The Politics. (S.  Everson, Ed.). Cambridge: Cambridge University Press. Arrow, K.  J. (1970). Political and Economic Evaluation of Social Effects and Externalities. In M.  Julius (Ed.), The Analysis of Public Output (pp.  1–30). National Bureau of Economic Research. Retrieved from http://www.nber. org/books/marg70-1 Bardhan, P. (1999). The Political Economy of Development in India. Oxford University Press. Retrieved from https://ideas.repec.org/b/oxp/obooks/ 9780195647709.html Barzel, Y. (1997). Economic Analysis of Property Rights. Cambridge: Cambridge University Press. Benson, B.  L. (1989). Enforcement of Private Property Rights in Primitive Societies: Law without Government. Journal of Libertarian Studies, 9, 1–26. Bethell, T. (1999). The Noblest Triumph: Property and Prosperity Through the Ages. Palgrave Macmillan. Cassirer, E., & Gay, P. (1954). The Question of Jean-Jacques Rousseau. Philosophy and Phenomenological Research, 15(2), 263–265. Cheung, S. N. S. (1983). The Contractual Nature of the Firm. The Journal of Law and Economics, 26(1), 1–21. https://doi.org/10.1086/467023 Coase, R. H. (1937). The Nature of the Firm. Economica, 4(6), 386–405. Coase, R. H. (1960). The Problem of Social Cost. The Journal of Law & Economics, 3, 1–44. Congleton, R. D. (2015). The nature of rent seeking. In R. D. Congleton & A. L. Hillman (Eds.), Companion to the Political Economy of Rent Seeking (pp. 3–9). Cheltenham, UK: Edward Elgar Publishing. Congleton, R. D., Hillman, A. L., & Kai, K. A. (2008). Forty Years of Research of Rent Seeking: An Overview. In R. D. Congleton, A. L. Hillman, & K. Kai A. (Eds.), 40 Years of Research on Rent Seeking I: Theory of Rent Seeking (pp. 1–54). Berlin, Heidelberg: Springer. Day, J.  P. (1966). Locke on Property. The Philosophical Quarterly, 16(64), 207–220. https://doi.org/10.2307/2218464 De Alessi, L. (1983). Property Rights, Transaction Costs, and X-Efficiency: An Essay in Economic Theory. The American Economic Review, 73(1), 64–81. Demsetz, H. (1967). Toward a theory of property rights. American Economic Review, 62, 347–359. Demsetz, H. (2003). Ownership and the Externality problem. In T. L. Anderson & F.  McChesney (Eds.), Property Rights: Cooperation, Conflict, and Law (pp. 282–300). Oxford, New York: Oxford University Press. Doner, R., & Ramsay, A. (2000). Rent seeking and economic development in Thailand. In M. Khan H. & K. Jomo S. (Eds.), Rent, rent-seeking, and economic

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

37

development: theory and evidence in Asia (pp. 145–181). Cambridge: Cambridge University Press. Eggertsson, T. (1990). Economic Behavior and Institutions. Cambridge England; New York: Cambridge University Press. Evans, P. B. (2012). Embedded Autonomy: States and Industrial Transformation. Princeton University Press. Furubotn, E. G., & Pejovich, S. (1972). Property Rights and Economic Theory: A Survey of Recent Literature. Journal of Economic Literature, 10(4), 1137–1162. Haber, S. (2002). Introduciton: The Political Economy of Crony Capitalism. In S.  Haber (Ed.), Crony Capitalism and Economic Growth in Latin America: Theory and Evidence (pp. XI–XXI). Hoover Press. Haber, S., Maurer, N., & Razo, A. (2003). The Politics of Property Rights: Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876–1929. Cambridge University Press. Herbst, J. (2014). States and Power in Africa: Comparative Lessons in Authority and Control – Second Edition. Princeton University Press. Hobbes, T. (2003). Leviathan. (G. A. G. Rogers & K. Schuhmann, Eds.). Bristol: Thoemmes Cintunuum. Kang, D.  C. (2002a). Bad Loans to Good Friends: Money Politics and the Developmental State in South Korea. International Organization, 56(1), 177–207. Kang, D.  C. (2002b). Crony Capitalism: Corruption and Development in South Korea and the Philippines. Cambridge University Press. Kelman, S. (1983). Limited government: An incoherent concept. Journal of Policy Analysis and Management, 3(1), 31–44. Khan, M. H. (1995). State Failure in Weak States: A Critique of New Institutionalist Explanations. In H. John, H. Janet, & L. Colin M. (Eds.), The New Institutional Economics and Third World Development (pp. 71–86). London: Routledge. Khan, M.  H. (2000). Rent Seeking as Process. In M.  Khan H. & K.  Jomo S. (Eds.), Rent, Rent-seeking, and Economic Development: Theory and Evidence in Asia (pp. 70–144). Cambridge: Cambridge University Press. Kramer, M. H. (2004). John Locke and the Origins of Private Property: Philosophical Explorations of Individualism, Community, and Equality. Cambridge University Press. Krueger, A. O. (1974). The Political Economy of the Rent-Seeking Society. The American Economic Review, 64(3), 291–303. Krueger, A. O. (2002). Why Crony Capitalism Is Bad for Economic Growth. In H. Stephen (Ed.), Crony Capitalism and Economic Growth in Latin America: Theory and Evidence (pp. 1–24). The Hoover Institution. Krusell, P., & Ríos-Rull, J.-V. (1996). Vested Interests in a Positive Theory of Stagnation and Growth. Review of Economic Studies, 63(2), 301–329.

38 

M. D. MIAH AND Y. SUZUKI

Locke, J. (1988). Two Treatise of Government. (Peter Laslett, Trans.). Cambridge: Cambridge University Press. Macpherson, C. B. (1978). Property, Mainstream and Critical Positions. Toronto, Buffalo: University of Toronto Press. McChesney, F. (2003). Government as Definer of Property Rights: Tragedy Exiting the Commons? In T. L. Anderson & F. McChesney (Eds.), Property Rights: Cooperation, Conflict, and Law (pp.  227–253). Princeton and Cambridge: Princeton University Press. McKeon, R. (1938). The Development of the Concept of Property in Political Philosophy: A Study of the Background of the Constitution. Ethics, 48(3), 297–366. Migdal, J. S. (1988). Strong Societies and Weak States: State-society Relations and State Capabilities in the Third World. Princeton University Press. Milgrom, P., & Roberts, J.  (1992). Economics, Organization and Management. Upper Saddle River, N.J: Prentice-Hall. Monbiot, G. (2001). Captive State: The Corporate Takeover of Britain. Basingstoke, Oxford: Pan Books. Nozick, R. (2013). Anarchy, State, and Utopia. NY: Basic Books. Plato. (1993). Republic. (R. Waterfield, Ed.). Oxford University Press. Riker, W. H., & Sened, I. (1991). A Political Theory of the Origin of Property Rights: Airport Slots. American Journal of Political Science, 35(4), 951–969. Rousseau, J.-J. (1984). A Discourse on Inequality. Penguin Books. Rousseau, J.-J. (1993). A Discourse on the Origin of Inequality. (G.D.H.  Cole, Trans.). London: D. Campbell. Sened, I. (1997). The Political Institution of Private Property. Cambridge: Cambridge University Press. Shleifer, A., & Vishny, R.  W. (1993). Corruption. The Quarterly Journal of Economics, 108(3), 599–617. Sreenivasan, G. (1995). The Limits of Lockean Rights in Property. Oxford University Press. Stevens, J. (1996). The Reasonableness of John Locke’s Majority: Property Rights, Consent, and Resistance in the Second Treatise. Political Theory, 24(3), 423–463. Stiglitz, J.  E. (1994). Whither Socialism? Cambridge, Massachusetts: The MIT Press. Tornell, A. (2002). Economic crisis and reform in Mexico. In H. Stephen (Ed.), Crony capitalism and economic growth in Latin America: theory and evidence (pp. 127–150). Stanford: Hoover Institution Press. Tullock, G. (1967). The Welfare Costs of Tariffs, Monopolies, and Theft. Economic Inquiry, 5(3), 224–232.

  THEORIES OF PROPERTY RIGHTS: TRANSACTION COST AND BEYOND 

39

Tullock, G. (1989). The Economics of Special Privilege and Rent Seeking. Boston: Kluwer Academic Publishers. Tullock, G. (2005). The rent-seeking society. (C.  K. R.  Charles, Ed.) (Vol. 5). Liberty Fund. Waldron, J. (1990). The Right to Private Property. Oxford: Clarendon Press. Williamson, O.  E. (1979). Transaction-Cost Economics: The Governance of Contractual Relations. The Journal of Law and Economics, 22(2), 233–261. Woo-Cumings, M. (1999). The Developmental State. Cornell University Press.

CHAPTER 3

The Development Discourse in the Context of Bangladesh: An Analytical View

3.1   Introduction Douglass North’s (1981: 6) assertion that “growth has been more exceptional than stagnation or decline” proves that economic growth still remains a mystery. This has facilitated the development of a considerable number of growth theories to convincingly explain why some countries grow and others decline. For these theories, developed countries serve as models to idealize growth and the elements that help these countries grow. On the other hand, developing or underdeveloped countries have always been the laboratory for testing different means and methods in an attempt to accelerate their respective economic growth. Like other developing countries, Bangladesh was a test case for international development agencies, including the World Bank and the International Monetary Fund (IMF). Faaland and Parkinson (1976), observing the socioeconomic conditions in the 1970s, considered Bangladesh a “test case of economic development”. Almost half a century has passed since the prediction was made, and one can draw a conclusion whether the economic journey of Bangladesh is a success story or a failure case. Obviously, the country has developed from its earlier status of a ‘bottomless basket’ to an emerging economy. Bangladesh, one of the densely populated countries in the world, is often featured by its vulnerability to natural calamities, including floods, droughts, and cyclone. Yet, the country has been able to materialize a

© The Author(s) 2018 M. D. Miah, Y. Suzuki, Power, Property Rights, and Economic Development, https://doi.org/10.1007/978-981-13-2763-6_3

41

42 

M. D. MIAH AND Y. SUZUKI

moderate economic growth over the last couple of decades. GDP growth rate averaged 5.15 percent in the 1990s, which increased to 6.97 percent for the period 2011–2016. Similarly, per capita GDP almost quadrupled in the last 20 years, from US$319 in 1995 (current US$) to US$1210 in 2016. Total GDP increased more than sixfold, from US$32.6 billion (current US$) in 1990 to US$221.24 billion in 2016. Infant mortality rate decreased from 80.8 (per thousand live births) in 1995 to 29.7 in 2015, leading to the rise of life expectancy at birth—from 58 years in 1990 to 72 years in 2018. Population growth rate, which has long been considered a national problem, plummeted from 2.47 percent in 1990 to 1.14 percent in 2016. Considering all these social and economic improvements, the former­UN Secretary-General Ban Ki-moon1 praised Bangladesh for its remarkable progress in achieving the Millennium Development Goals. Moreover, the country has been recognized as one of the next-eleven (N-11) emerging countries after BRICs (Brazil, Russia, India, and China). Thanks to the impressive economic progress over the last two decades or so, Bangladesh is preparing to upgrade its economic status from ‘least developed’ to ‘developing country’. This remarkable achievement of Bangladesh has attracted attention from international scholars and development institutions as to how the development of an underdeveloped country can be framed even in a growth-hostile environment. For instance, Jeffrey Sachs is keen to credit Bangladesh for its achievement, and argues, “Bangladesh shows us that even in circumstances that seem the most hopeless there are ways forward if the right strategies are applied, and of the right combination of investment is made” (Sachs 2005: 10). Sachs, however, recognizes that Bangladesh is in the first rung of the development ladder and has a long way to go. The point to note is that the country has barely managed to place itself only in the first rung of the development ladder after 45 years of its independence. This postulation deserves further attention and intellectual discussion as to whether the current level of economic achievement reflects the true potential of the country. Bangladesh has introduced various economic and political reforms in the last couple of decades, prescribed by international development agencies, including the World Bank and IMF. The state’s role has been squeezed gradually, echoing with the mantra ‘take the state out of business’ to leave more room for the market. Among all these, political transition from the prolonged dictatorial rule to a parliamentary democratic system in 1991

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

43

was considered an important landmark in the changing landscape of the sociopolitical environment of Bangladesh. Achieving moderate economic growth in the presence of all these growth-friendly socioeconomic underpinnings does not sufficiently justify the growth potential of the country. This anomaly, perhaps, bears the testimony of what A. Hossain concludes “in the test for economic development, Bangladesh has failed” (M.  A. Hossain 1996). In other words, the growth potential of the country has been suppressed by some elements, which need to be carefully scrutinized and ameliorated so that the country benefits by materializing its full potential. This chapter attempts to pinpoint these factors. In so doing, the chapter analyzes the growth drivers of the economy and identifies what steps are required further to accelerate the growth of the country. The chapter has been structured as follows: Section 3.2 illustrates the economic condition of Bangladesh, showing various historical data in assessing the level of economic development of the country. Section 3.3 explains the feasibility of economic changes through the traditional agrarian development, which still occupies the center of the development agenda in Bangladesh. Section 3.4 focuses on infrastructure development as a means for a big push. Neoclassical growth model in the context of Bangladesh is discussed in Sect. 3.5, whereas Sect. 3.6 enumerates what is still missing from the development discourse. This is followed by a brief conclusion.

3.2   Economic Reality of Bangladesh The economy of Bangladesh is characterized by a dual system—the dominant agriculture sector and the urban small capitalist class. As of 2016, 65 percent of the total population lived in the rural area, where the crucial means of livelihood is agriculture, which is even vulnerable to natural calamities. In 1972, agriculture contributed about 60 percent of the total GDP, which has been declining over the years. The tertiary or service sector is taking the place of declining agriculture sector, whereas contribution from the industrial sector is still very low (Fig. 3.1). In 2016, more than half (56.46 percent) of the total GDP was from the service sector, whereas industrial contribution accounted for only 28.77 percent and the ­r emaining 14.77 percent was contributed by agriculture. Labor force participation rate is a little more than half (58.5 percent) of the total population, the majority of whom are

44 

M. D. MIAH AND Y. SUZUKI

100 90 80 70 60 50 40 30 20 10 0

Service

Industry Agriculture

Fig. 3.1  Composition of GDP. (Source: World Development Indicator (online version)) Table 3.1  Macroeconomic indicators of Bangladesh 1971–‘80 1981–‘90 1991–‘00 2001–‘10 2011–‘16 GDP Growth Rate (in %) Population Growth Rate (in %) Inflation (CPI in %) Gross domestic savings (% of GDP) Gross capital formation (% of GDP)

1.04 2.36 22.88 1.39 9.38

3.73 2.36 9.52 8.5 16.75

4.8 2.14 4.01 14.12 19.72

5.8 1.37 6.56 17.72 24.08

6.45 1.14 7.19 21.00 28.53

Source: World Development Indicators (WDI)

employed in the agricultural sector. Of the total employed labor force, 43 percent is absorbed by the agricultural sector, 20 percent by industry, and 37 percent by the service sector (Asian Development Bank 2017). Annual value addition per worker in agriculture is only US$389, whereas the respective figures for industry and service sectors are $1772 and $1389 (in 2000 prices). Growth rate of the gross value addition by agriculture averaged 2.32 percent in 1980–1990, which rose to 5.27 percent in 2000–2010 before declining to 3.42 percent during the period 2011–2016. Respective statistics for the industry were 4.79, 7.17, and 9.5 percent (ADB 2017). Value addition of the ­service sector grew an average 3.47 percent from 1980 to 1990 and 6.00 percent from 2011 to 2016.

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

45

Table 3.1 shows other macroeconomic indicators of Bangladesh. Before 1971, the economy was seriously suppressed by the administration of West Pakistan (Pakistan). Consequently, the country suffered from tremendous policy bias economically and politically. GDP growth rate fluctuated tremendously and was significantly negative during the period 1972–1974 because of the liberation war. The rate, however, recovered gradually in the subsequent period. If the figures for the first two years after independence are disregarded as they are outliers, average GDP growth rate hovers around 5 percent annually. Particularly, GDP growth rate averaged more than 6 percent for one and a half decades, starting from the new millennium. In 1975, per capita GDP amounted to US$228, which increased to US$1210  in 2015 (current price). A decline in population growth rate has helped to tap the benefit from the rise of GDP growth rate. The rise of per capita income has had a positive impact on peoples’ savings. Gross domestic savings increased to 21 percent of GDP in 2016 from its earlier single digit rate in 1990. Similarly, gross capital formation has increased substantially. The country’s dependence on external debt has declined commensurably. It cost about one and a half percent of the total GNI to service its debt in 2001, which declined by half of that level in 2016. Export increased from US$7.21 billion in 2000 to 35 billion in 2015, averaging annual growth rate of 24 percent. A country which was once featured by negative current account balance can count on positive balance of about 1.5 percent of the GDP per year. Thanks to the economic and financial openness, almost half of the total GDP value is involved with international trade. While the above statistics shows a comparatively rosy picture of the country, some setbacks are also obvious. One such setback is the soaring inflation rate. Average inflation rate stays well above the GDP growth rate in independent Bangladesh except in the 1990s. If we adjust GDP growth rate with its deflator, real GDP per capita growth appears to be negative. This scenario leads economists to conclude that the current GDP growth rate can hardly change the overall living standard of the people of Bangladesh. Since the GDP base is very small, US$221.41 billion (in 2016 price), a moderate growth is not sufficient enough to accelerate the country from the pre-takeoff to the take-off stage. Moreover, half of the total population lives in abject poverty. In terms of purchasing power ­parity (PPP), about 19 percent of the total population sustain their livelihood with an income of less than US$1.90 a day, and 57 percent less than

46 

M. D. MIAH AND Y. SUZUKI

US$3.1 a day (ADB 2017). Although attempts have been made to increase the living standard, the human development index changed positively only by a tiny fraction—from 0.42 in 1990 to 0.47 in 2010. In 2015, the index increased to 0.58, based on which the country was jointly ranked 139th with Ghana and Zambia out of 188 countries and fifth in South Asia, lagging behind Sri Lanka, the Maldives, India, and Bhutan. Although agricultural contribution to GDP has been declining over the years, the gap is filled by the tertiary sector, meaning that manufacturing has failed to play a dominant role in accelerating growth. History rarely shows that countries have graduated to an upper level of economic development without a strong manufacturing base. It is indeed true that the country has earned self-sufficiency in food-grain production because of its arable land and natural ambience, but it is increasingly relying on import for fixed capital goods, including machinery, medicines, prepared foods, minerals, chemicals, and other high-tech products. In 1990, total export accounted for 5.1 percent of total GDP, which rose to 18.27 percent in 2010, whereas the total import increased from 11.6 percent in 1990 to 28 percent in 2010. This proves that Bangladesh is still staggering, with a very low level of equilibrium trap. After four and a half decades of its independence, Bangladesh could not manage to get out of its LDC (least developed country) status. How can we explain the economic malaise of Bangladesh? In the following sections, we evaluate various development hypotheses that have attempted to explain the reasons for economic underdevelopment of Bangladesh. We further highlight what is missing from the current development discourse.

3.3   Structural Shift Through Agrarian Development Although its influence has declined considerably in the developed countries, the evolutionary school has a lasting impact on the debate as to why developing countries have failed to accelerate their economic progress. The school argues that a dynamic transformation from a traditional agriculture-­dominant economy to a modern industrial society is feasible if the agricultural sector is modernized through improved technology, which, in turn, will lead to increased productivity. The effect of increase productivity will be seen by the rise of purchasing power of the agrarian population. The demand for non-farm products will rise as a result.

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

47

Increased demand will pave the way for industrialization. This hypothesis can be labeled as the ‘demand-driven’ strategy of development. This demand-driven hypothesis is influenced by Adelman (1984). Adelman stresses that the role of increased agricultural productivity via technological innovation and increased investment in raising rural incomes for ‘agricultural-demand-led-industrialization’ (ADLI) is critical for agro-­ based economies. Given the institutional link of the agricultural sector to the rest of the economy, a stimulus on agriculture activities is expected to induce a strong demand, and thereby, foster industrial expansion. Vogel (1994) extends Adelman’s thesis and applies Social Accounting Matrix (SAM)—aggregate structural interrelationships among the various agents of an economy—to identify the importance of agriculture on industrialization, and finds that at the low level of development, agriculture possesses strong backward links to non-agriculture production activities, possibly so high that a $1 expenditure in agriculture generates $2.75  in induced demand in non-agriculture demand and the link continues to increase during the course of development. In the case of India, Chakravarty (1979) strongly favors agriculture-­ first strategy for industrialization. He argues that the desirability as well as the feasibility of an export-led industrialization strategy in a slow-growing economy will not be realized. Chakravarty further states that the long-­ term growth must primarily be based on the expansion of internal, rather than external, demand. Storm (1995) supports a policy that an increase in agricultural production and income is likely to improve industrial performance because they expand the size of the domestic market. Thus, industrialization of countries with a low economic base can mainly be sustained by the expansion of the agricultural sector. Believing in this evolutionary school, scholars in the context of Bangladesh argue that the development strategy of the country depends largely on the development of agriculture. For example, Faruqee (1998) and Palmer-Jones (1999) advocate strategies that focus on the promotion of the agricultural sector. In the same token, Ali (2007) contends that social change will not occur until food security is achieved and farm income increases to raise people’s aspiration level. Such a mechanism for boosting agro-productivity is coined as ‘green revolution’ in the existing literature (Alauddin and Tisdell 1995; M. Hossain 1991). Green revolution in agriculture gives a strong stimulus to non-farm employment through consumption linkage (M. Hossain 1998). Modern large-scale agriculture requires industrial products as inputs and raw

48 

M. D. MIAH AND Y. SUZUKI

­ aterials, which means that the demand for service and non-farm prodm ucts increases, leading to the creation of new job opportunities in the nonfarm sector (Alauddin and Tisdell 1995). At the same time, wage rate in the non-farm sector increases. The combined effect is that surplus labors in the agricultural sector can be shifted to the non-farm sector. Increased income in both the farm and non-farm sectors brought by a green revolution will be followed by an accumulation of capital. Such a capital accumulation facilitates the capitalist development. Khan (2004) describes the mechanism of transformation A necessary condition for a productivity transformation in agriculture would be the consolidation of landholdings into farms that were of higher productivity, and which could drive further productivity growth through the re-­ investment of firm surpluses. This type of transformation to higher productivity in agriculture has typically involved a capitalist transition that has created firms of a size adequate for generating and re-investment an agrarian surplus.

Needless to say, the emergence of a capitalist class is critical for industrialization of a country such as Bangladesh. However, it is uncertain to what extent an agriculture-first strategy can facilitate the emergence of a capitalist class in the context of Bangladesh if other socioeconomic parameters are not considered. William Arthur Lewis’s two-sector model of economic development can help clarify the issue. Lewis (1954) argues that most developing economies can be characterized by the presence of a dominant agricultural or traditional sector and a small capitalist class. The traditional sector usually absorbs a huge labor force which works even at subsistence wage rate. Overall, the population is so large relative to the capital and natural resources that marginal productivity of labor is insignificant or zero. This induces rural employers to employ more labor at subsistence wage and expand the sector as long as subsistence labor is available. As a result, the rural traditional sector is incapable of generating reproducible capital through capital accumulation. On the other hand, subsistence wage restricts workers’ capability to save for non-farm consumption and improve their situation from s­ ubsistence to surplus level. This situation is labeled as ‘vicious circle’ or low-­level equilibrium trap. In contrast, the urban capitalist sector is very small and growing. Capitalists recruit labor force until the marginal wage equals marginal productivity. At this stage, capitalists enjoy huge surplus as profit, which can

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

49

be expanded for further investment. Given the abundance of labor force in the traditional sector, expansion of industrial activities seems to be easier as long as investible capital is available. Tapping additional labor force for industry, however, does not negatively affect the agricultural productivity. This process not only accelerates industrialization but also increases labor productivity in the traditional sector and continues until the labor surplus disappears. From this view, Lewis argues that the primary requirement for economic development is the rapid accumulation, which can be facilitated by altering income distribution to saving. In the context of Bangladesh, it is observed that labor force participation rate is almost constant in the agricultural sector. In 1983, employed labor in this sector comprised 59 percent of the total labor force, which declined to 52 percent in 2003, and 43 percent in 2016. If we assume that the labor market was in equilibrium in 1983, a declining share of agriculture to GDP in the subsequent period should have been accompanied by an equivalent level of labor force decline. However, agricultural share to GDP declined by more than half—from 31 percent in 1983 to 15 percent in 2016. In other words, labor force engagement over the years (1983–2016) declined by 27 percent while the share of agriculture to GDP declined by 52 percent. Assume that technology is constant and the share of agriculture to GDP growth rate as well as the labor absorption rate of agriculture from the pool of labor newly joined in the workforce are equal. In this case, even if we assume that there was no excess labor in the agricultural sector in 1983, it has accumulated a significant amount of excess labor over the period. Now let us relax some assumptions. The second assumption is held in reality, loosely though. Over the period 1981–2016, the GDP grew 5.2 percent on average, of which agriculture contributed almost a quarter of it (5.2% × 24.75% = 1.29%). Meanwhile, population increased by little less than 2 percent and the agricultural sector absorbed more than half of it (1.93% × 52.20% = 1%). This implies that the contribution of agriculture and the increased labor absorption match to some extent. But the first assumption that technology is constant is not true. Over the years, technology has increased significantly, though not overwhelmingly in the context of Bangladesh. Use of both shallow and deep tube wells has increased manifold (Adnan 1999), along with improved technology of farming tools such as power tiller. Moreover, the consumption of chemical fertilizers and pesticides also increased substantially. Chowdhury and Shahabuddin (1992) show that the use of chemical fertilizers in the agricultural sector

50 

M. D. MIAH AND Y. SUZUKI

increased by about 200 percent between the periods 1965–66 and 1989–90. Of course, the rate of increase is faster in the subsequent period due to privatization of the fertilizer market. An estimate suggests that the share of the private sector in the fertilizer market increased from less than 5 percent to more than 90 percent over the period 1987–1992 (Shahabuddin 1999). Although the share of agriculture to GDP has declined over the period 1983–2003, the labor force participation did not decline commensurably. This postulates that there is already excess labor in the sector. The adoption of technology to agriculture should bring at least two effects: swelling of output or release of labor force from the sector. We see neither of these effects. This circumstance proves the Lewis hypothesis (1954) that in developing countries the primary sector is overburdened by subsistence labor. If this is the case, an increase in income of the rural population through modernization of agriculture is unlikely to induce demand for industrial output, and thereby, successful industrialization. The validity of this proposition further can be derived from the fact that the daily wage of human labor increased by 104 percent from 1985 to 2000, whereas the consumer price index increased by 133 percent over the same period. If we assume that subsistence earning was maintained in 1985, labor employed in the agriculture was forced to sink below this subsistence level in the subsequent period because of slicing their purchasing power. From this vintage point, it can be concluded that it is infeasible that countries such as Bangladesh, which are dominated by a large traditional sector with a relatively small capitalist class, can materialize its ambition of industrialization by adopting a demand-driven strategy. Hirschman (1958: 109–110) argues, “[A]griculture certainly stands convicted on the count of its lack of direct stimulus to the setting up of new activities through linkage effects: the superiority of manufacturing … is crushing.” For Hirschman, weak backward linkage of agriculture may fail to induce capital formation; hence, agriculture could not be the leading sector in the big push. Much earlier, Marx (see Elster 1986) shared the concern of ‘demand-­ driven’ strategy for economic growth. The model emphasizes  on ­increasing the demand for local goods and services, which, in turn, will stimulate production—and thereby income—for a large population. The income-­consumption spiral will accelerate GDP growth as long as the domestic producers can satisfy the rising demand. However, a critical issue is the sustainability of this spiral. The Marxian school argues that an

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

51

egalitarian distribution of income is a critical prerequisite to sustain demand-led growth, an aspect that is missing from the policy agenda of the demand-­driven strategy in Bangladesh. According to World Bank data, the Gini co-efficient was 0.28 in 1992, which rose to 0.33 in 1996 before it finally settled in 0.35 in 2015. Osmani and Sen (2011) provide data with detailed stratification. They show that the rise in inequality of the last decade was due to a sharp increase in the income of the richest quintile of the population compared to the others. Growth in per capita income was above the mean income only after the 80th percentile. This provides the evidence that lack of egalitarian distribution of income can be considered one of the critical reasons for the failure of demand-driven strategy in Bangladesh (more discussion in Sect. 3.6).

3.4   The ‘Big Push’ for Infrastructure Development For explaining low productivity in agriculture as well as overall economic backwardness in underdeveloped countries, economists often resort to argument that inadequate public spending in the form of infrastructure is a critical constraint in economic development. One of the major disadvantages of underdeveloped infrastructure is that it keeps agrarian society in a low equilibrium trap because underdeveloped infrastructures hinder the transferability of primary products. Based on this presumption, Rosenstein-­ Rodan (1943) calls for a huge investment in the infrastructure so that a ‘big-push’ toward industrialization can be created. He argues: National and international investment should concentrate at the start on building of ‘basic industries’ and public utilities which give rise to new investment opportunities. ‘Let us build railways, roads, canals, hydro-­ electric power-stations, the rest will follow automatically.’ Where the lack of transport facilities is a flagrant obstacle to economic progress, that may indeed be the best start of development investment (1943: 8).

Since private investment is inadequate to undertake such a massive investment because of the externality involved, the government has to play a crucial role. Nurkse (1958) has bestowed a precision to the role of the state for undertaking massive public investment. For Nurkse, the major impediment for underdeveloped economies is the economic size of the local market. Bangladesh is a country with a huge population, but the

52 

M. D. MIAH AND Y. SUZUKI

purchasing power of the majority of her population is too small. Low purchasing power not only undermines local private investment, but foreign investments are also reluctant to flow in despite the attractive return on invested capital. Nurkse argues that abolishing restrictions on the international flow of goods and investments, and increasing the export of primary products with inelastic and stationary demand would not work properly unless basic infrastructure is built to reduce transaction cost. As a result, initially “the marginal productivity of capital in the poor countries, as compared with the rich, may be high indeed, but not necessarily in private business terms” (1958: 26). In the context of Bangladesh, Rahman and Bakht (1997) contend that the poor performance of the economy can be attributed in large part to inadequate public investment. Even though Khan and Hossain (1989) suggest that the lack of infrastructure in Bangladesh is a serious obstacle to industrialization, they, however, recognize that it is a formidable obstacle. Muhith (1999), however, believes that public spending is necessary for creating job opportunities for unemployed people so that poverty is eradicated. Despite this powerful proposition, the validity and applicability of Nurkse’s hypothesis depend on many other factors, and thus, development in infrastructure may be a necessary condition but not sufficient on its own. If the lack of infrastructure results in higher transaction and transportation costs, the political version of the ‘tragedy of the common’ may have the same impact. Or in other words, institutional constraints can spoil the benefit of lower transaction cost even in the presence of modern infrastructure. In the absence of institutional constraints, marginal productivity of capital in the poor countries would have been higher even in private business terms. Figure 3.2 shows that the public investment in Bangladesh is at par with many other developing and developed countries, including South Korea, Thailand, and India when these countries were at the economic takeoff. Public investment in South Korea was even lower than that of Bangladesh. South Korea has been successful in accelerating its economic growth with the same level of public investment as Bangladesh. This scenario undermines the ‘golden rule’ advocated by influential economists that a government can incur deficit budget and borrow so long as it relates to development projects such as infrastructure. There is no denying that if we build more roads, the size of the economy will shrink in terms of transportation and transferability of goods and

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

53

14 12 10 8 % 6 4 2

Thailand

Korea, Rep. of

00

98

20

96

19

94

19

92

India

19

90

19

88

19

19

86

84

19

82

19

80

19

78

19

76

19

74

19

72

19

19

19

70

0

Bangladesh

Fig. 3.2  Public investment in some selected Asian countries (in % of GDP). (Source: Constructed from Everhart and Sumlinski 2001)

services. As a consequence, local-urban income disparity will be reduced. If availability of energy and power for industries can be ensured, an increased level of production can be expected. Similarly, more schools will entice an extended number of population to formal schooling. These propositions are valid more for underdeveloped economies than the developed countries because the elasticity of return on infrastructure is higher for developing and underdeveloped countries than for developed economies. Nonetheless, one can easily argue that since underdeveloped countries are poor, they do not have the capability to spend on infrastructure. Once a country achieves a certain level of development threshold, building infrastructure as well as providing other such logistical facilities would be much easier. Thus, we might expect a two-way causality between infrastructure and economic development. Inspired by this idea, Filmer (2007) asks: “if you build it (school), will they come?” to examine whether building more schools in poor countries can increase the literacy rate. He finds that among the 21 sample countries, the mean distance to the nearest primary school is the lowest in Bangladesh and India (0.2  km). These two countries are followed by Philippines (0.5 km). On the other hand, the nearest distance to the secondary school is 2 km and 4.5 km in Bangladesh and India, respectively. Data, however, shows that the primary completion rate in Bangladesh is

54 

M. D. MIAH AND Y. SUZUKI

less than the Philippines. Average primary completion rate in Bangladesh for the period 1998–2002 was 77 percent, whereas in Philippines it was 95 percent (Filmer 2007). Similarly, secondary enrollment rate in Bangladesh in 2002 was 44 percent, whereas in Philippines it was 56 percent. On the basis of this, Filmer concludes, “although increasing school availability can be a tool for increasing enrolments, it cannot typically be expected to have a large overall effect” (2007: 902). The weakness of the study is that it assumes the quality of school does not differ across and within countries. However, it shows that building infrastructure does not ensure progress of society if other complementary institutions do not support it. Similarly, Mozumder and Marathe (2007) examine the relationship between per capita electricity consumption and GDP for Bangladesh, and find that there is a unidirectional causality from per capita GDP to per capita electricity consumption. However, electricity consumption does not cause an increase in GDP in Bangladesh. They argue that the finding is not an exception. Rather, GDP has a greater impact on power consumption, rather than the other way around in many developing and underdeveloped countries. This implies that ‘big-push’ strategy of infrastructure development through public spending is necessary but not sufficient in its own for economic development of developing countries.

3.5   The Neoclassical Growth Paradigm Contrary to the notion of interventionist development strategy, neoclassical economists recognize certain factors such as capital, labor, and technology as the growth drivers. They find that most of the poor countries are poor because they are also poor in accumulating capital and improving technology. If we put more capital and skilled labor, as well as upgrade technology, growth will follow. Realizing the importance of neoclassical prescription, Hossain and Rashid (1996: 57) argue, “a country’s development progress can be interpreted in terms of relaxation of various constraints and bottlenecks. Prominent of them are savings constraint, the foreign exchange constraint, and the agriculture supply constraint. With the relaxation of these constraints, an economy begins to grow and with it, undergoes a structural transformation.” From this context, economic underdevelopment of Bangladesh can be attributed to the presence of such constraints. Similarly, Rahman and Bakht (1997) point out certain constraints, which they term “structural and exogenous constraints”, that are acting as hindrances to the industrial development of Bangladesh. As viewed by traditional growth

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

55

model, critical constraints among them are savings and investment, infrastructure, human and physical capital, and so on. Gross domestic savings and gross capital formation in Bangladesh have been increasing over the years. However, both savings and capital formation are miniscule. Low saving means lower level of investment. Lower investment leads to low level of capital available for labor and the resulting lower productivity. If productivity cannot be increased, nothing would be left for savings after consumption. This is a sort of vicious cycle, which underdeveloped countries are trapped with. For instance, Huq and Love (2000) contend that the slow growth of manufacturing results from the low level of investment in the sector. They attribute the reason of low investment in manufacturing to ‘wrong types of investment’ or inefficient use of capital funds. This follows that it is not enough for a country to accumulate a sizable level of capital and technology, but capital has to be distributed efficiently and technology has to be utilized properly. Even though it is infeasible to rank factors responsible for growth according to their relative importance for economic development in Bangladesh, A.  Hossain (1996) however, is pronounced to explain the preeminence of technology compared to other factors. He argues that without technological underpinnings, economic prosperity in Bangladesh is hard to come by. In the same token, A. Ali (1996) argues that in order for Bangladesh to reach the same level of economic development like East Asian economies by the next few decades, it is invariably necessary to update its technological frontiers. For A. Ali, “the futures of all Bangladeshis are closely related to the policy of mechanization of production in all sectors of the economy in Bangladesh” (1996: 146–7). The effect of capital and technology on productivity is examined by Robert Solow (Solow 1956, 1957). His pioneering work shows that capital intensity (the ratio of capital to labor) is the growth driver, which is further governed by the rate of savings and population growth. If the rate of savings is greater than replacement requirement (population growth plus depreciation of capital stock), a country grows, but at a diminishing rate. This means that under this condition, a country that initially functions at low capital intensity grows faster than a country with high capital intensity. They reach a steady state in the long run where savings equal replacement requirement. Thus, the convergence between them should take place.2 This implies that capital stock has no special effect in the long run for economic growth. The only force that continuously leads to sustained increase in productivity is technology. A country must focus on technological advancement in order to grow faster.

56 

M. D. MIAH AND Y. SUZUKI

If we accept Solow’s explanation, Bangladesh, which produces at the low level of capital intensity, should grow faster initially than a country such as South Korea, which has higher capital intensity. Contrary to the model, their growth experience shows the reverse scenario. Barro (1991) finds no significant negative correlation between the initial level of GDP (capital) and the subsequent growth for 98 countries for the period 1960–1985. Moreover, if productivity or output per capita is driven by capital accumulation and a constant rate of technological progress alone, growth rate between the poor and the rich would have converged. Because capital is more productive in the capital-scarce country, the return on capital should be higher compared to capital-abundant countries. Resultantly, capital should flow from the latter to the former until the return on capital is equal. Lucas (1990) examines this hypothesis and finds that in order to explain the capital (per worker) gap between the US and India, which is 15 times (in 1988 measure), US workers should have 900 times more machines than Indians do. If machines are so scarce in India, the rate of return should have been 58 times larger than the current rate. Similarly, King and Rebelo (1993) analyze US data for 100 years during which the income per capita increased sevenfold. They conclude that transitional dynamic driven by capital accumulation cannot even explain half of this rise. Calibrating the model to the actual data yields unreasonably high marginal productivity of capital in the early phase (real interest rate in excess of 100 percent), which is a clear contrast to the model. Capital-scarce poor countries grow slower than the capital-abundant rich countries. Thus, instead of converging, countries are diverging. Moreover, capital is not flowing from the rich to the poor countries, but rather the opposite is true. Easterly (2002) reports that in 1990, the richest 20 percent of the population received 88 percent of private capital gross inflows, whereas the poorest 20 percent received merely 1 percent. Solow focuses on physical capital without segregating human capital, which is a weakness of the model. This is exactly what Mankiw et  al. (1992) find after incorporating human capital in the Solow model, which they call ‘augmented Solow model’. They not only confirm the predictable accuracy of the Solow model but also show that the magnitude of explanatory power of Solow model increases after accounting for human capital. The modified model can explain almost 80 percent of the cross-­ country variation of per capita income in 1985. Similarly, Barro (1991) finds that poor countries tend to grow faster than the richer countries, or

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

57

convergence between them takes place only for a given quantity of human capital. This may explain economic underdevelopment of Bangladesh, where a large percentage of the total population is illiterate. The primary completion rate of Thailand during 1998–2002 averaged 87 percent, whereas in Bangladesh it was 77 percent. However, GDP per capita in Thailand in 2007 was estimated to be more than six times the GDP of Bangladesh. Similarly, the primary completion rate of Tajikistan is 99 percent, with per capita GDP less than half of Bangladesh. In contrast, Ukraine achieves a lower primary completion rate (59 percent) than Bangladesh, but the GDP per capita of the former is more than double the latter’s. Because of lack of significant correlation between education and growth, Easterly (2002: 73) asks, “Where has all the education gone?” He argues that African countries, despite their rapid growth in human capital over the period 1960–1987, merely experienced growth disaster. Zambia has slightly faster expansion of human capital than Korea, but the former growth rate was seven percentage points lower than the latter. Similarly, Eastern Europe and former Soviet Union parallel Western Europe and North American countries in terms of years of schooling. However, the former countries’ GDPs are merely a small fraction of the latter’s. This implies that traditional growth drivers such as human capital, physical capital, and technology are necessary but not sufficient to explain the economic underdevelopment across countries. The importance of capital and technology for economic prosperity can hardly be denied. Moreover, the question is not whether capital and technology drive economic growth or not. But rather, it is natural to ask: even though the capital is scarce in poor countries, why do people not save, or why is it that capital does not flow from the rich to the poor? Why do capitalists not materialize higher return on capital from developing countries? The seminal work of Gerschenkron (1962) sheds an analytical light on the economic backwardness of countries. Gerschenkron argues that the history of industrialization in Europe shows that countries that adopted advanced technology were always in the frontline toward industrialization. For Gerschenkron, it is the ‘tension’ between the existing states of economic activities and the expected benefits resulting from industrialization that accelerates the process of industrialization. He argues, “[T]he contingency of a large imports of foreign machinery and of foreign knowhow, and the concomitant opportunities for rapid industrialization with the passage of time, increasingly widened the gulf between economic potentialities and economic actualities in backward countries” (1962: 8).

58 

M. D. MIAH AND Y. SUZUKI

As such, it might be wise for backward countries at the outset of industrialization to accommodate advanced technologies because only when industrial development commences in a large scale can the ‘tension’ between the preindustrialized state and the expected gains from industrialization be strong enough to overcome the existing obstacles to progress. The larger the challenge or ‘tension’, the more is the volume of response to remove those obstacles. The ‘tension’ between the current state of economic activities and the expected gain from industrialization in Bangladesh should be high, taking into consideration the level of current economic development. Thus, in view of the Gerschenkronian hypothesis, industrialization in Bangladesh should take place in a great spurt. Unfortunately, we do not see this in practice. If we accept the Gerschenkronin thesis, this anomaly can be explained by the fact that the expected gain is discounted by the institutional obstacles so much that the ‘tension’ is reduced substantially. Unless it is ensured that each is entitled to receive what he earns, and also that earning is linearly related to efforts, the gap cannot be transformed into a real tension. This is where the real spirit of institution lies. Unfortunately, the contemporary development theories take institutions either for granted or not relevant to economic progress. But none of these axioms is realistic.

3.6   Institutions Matter Karl Marx shows the process for gradual development of a society. For Marx, development takes place by a complex interaction between different elements in a certain mode of production (Elster 1986). The mode of production is used in the Marxian historical materialism to mean a specific organization of economic production in a given society. A mode of production includes the means of production or the forces of production, and also relations of production or property form. Forces of production include the means of production used by a given society, such as factories and other facilities, machines, and raw materials. It also includes labor and the organization of the labor force. On the other hand, the term ‘relation of production’ refers to the relationship between those who own the means of production, that is, the rights on property (Table 3.2). Marx is concerned with the interaction of technical progress, the social organization that harnesses it, and the state system and ideological systems that support it. The development of a society from one mode of production to another can be segregated by the differences in

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

59

Table 3.2  Marx’s analysis of the mode of production Superstructure (political and ideological) Relations of production (form of property rights) Forces of Production (technology, science, and human skill)

Cultural-institutional subsystem Economic subsystem

the relations of production. For example, in the Asiatic mode of production, the first of the historical mode of production, land was owned by the state. In contrast, in the capitalist mode of production, the latest evolution of the social system, land is owned by individuals. This difference in the relations of production has enormous impact on the economic outcome of the property. According to Marx, politics and ideas are explained by the fact that they stabilize property rights, whereas property rights are explained by the fact that they give an impetus to technical changes. If so, it is not merely factors of production that play a crucial role for economic outcome, but also the system of property rights. However, while the growth of the forces of production may make an existing set of relations of production obsolete, this does not ensure that a more appropriate set of relations of production will actually emerge. In the Marxian context, when the r­elations of production are no longer effective in generating growth, they are said to become a fetter on further development. Based on Marx, Hayami (2001: 10) categorizes the first two sets of components as a cultural-institutional subsystem and the third set of component as an economic subsystem. The evolution of social system is, thus, a process of dialectic interaction between economic and cultural-­ institutional variables. If economic progress is measured by an increase in average per capita income, then it is realized through the increase of per capita resource endowments or progress in technology which, in turn, increases the per capita value addition. In this sense, an increase in economic resources and progress in economic technology is inseparably interrelated. However, the productivity of economic subsystem is constrained and influenced greatly by cultural and institutional subsystems of society. For example, the rate of savings that can be transformed into investment is determined by the people’s future preference over current consumption. This is greatly influenced by the value system and the institutional settings in which they interact. In the real-world scenario, the economic subsystem and cultural-institutional subsystem are interrelated, and together, they influence economic and social outcomes.

60 

M. D. MIAH AND Y. SUZUKI

Unfortunately, the current attempt to explain the development backlash in developing countries in general, and Bangladesh in particular, is not well poised, given the fact that economists concentrate heavily on the economic subsystem while neglecting its interrelated or complementary counterpart, the institutional subsystem. Neoclassical prescriptions do not at all pay attention to the fact that society’s economic system has too many complex parts and any fault in a critical part can disrupt the whole system. Bethell (1999: 2) contends: Economic analysis is like a suspension bridge. It can have all the fancy engineering you want, but at some point it must reach to the solid rock of law and secure political institutions .… Economic outcomes are thought to be satisfactorily explained by economic data. Growth is a function of “capital formation,” for example. But capital is highly derivative abstract, a mere cable on the suspension bridge. Is the whole structure embedded in the solid foundation of secure property rights, enforceable contracts, an independent judicial system?

Looking at Bangladesh through the institutional lens does not reveal a rosy picture. Institutional quality in the last couple of years has ­deteriorated in most instances. The World Bank ranks countries on various measures of institutional quality. In the category of ‘ease of doing business’, countries are ranked by sorting the aggregate distance to frontier scores. An economy’s distance to frontier is reflected on a scale from 0 to 100, where 0 represents the lowest performance and a score of 100 represents the best performance (frontier). In 2016, Bangladesh ranked 176th of the 190 countries considered in the study and 7th among the eight South Asian countries (ahead of Afghanistan only). Distance to frontier in 2010 was 45.52, which declined and reached its lowest in 2015 (40.67). In the subsequent period, the score remained unchanged. The World Bank also provides data on ‘Country Policy and Institutional Assessment’ in which it rates a country against a set of 16 criteria, grouped into four clusters: economic management, structural policies, policies for social inclusion and equity, and public sector management and institutions. None of these criteria shows any improvement of institutional quality. Bangladesh scored 3.5 on a scale of 1 (low) to 6 (high) in ‘business regulatory environment’ in 2014. In 2015 and 2016, the score declined to 3.0. Among various subcategories, the ‘financial sector rating’ remained at an absolute disappointing level. The score was 3.5 in 2009 and 2010,

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

61

which declined to 3 in 2011 and 2012, and finally tumbled down to 2.5 in the subsequent period (2013–2016). Institutional quality of other segments is also depressing. Protection of property rights is the most pragmatic element of institutions. Property Rights Alliance provides rating and ranking of countries across the world on property rights. The overall grading scale of property rights index ranges between 0 (lowest) and 10 (highest). As per the latest data (2017), Bangladesh ranks 125th in the world, the lowest in Asia. India ranks 54th and Sri Lanka 59th. Even Nepal ranks much ahead of Bangladesh (76th), while Pakistan finishes closely ahead of Bangladesh (121). Among all the subcategories, ‘judicial independence’ has deteriorated more than any other institutional measures. Bangladesh scored 4.1 and ranked 83  in 2013. The score declined to 3.18 in 2017, based on which the country was ranked 107. It can be argued that despite these institutional setbacks, the GDP of Bangladesh has been progressing at a moderate rate. While this claim remains valid, the explanation lies elsewhere. In many instances, measuring economic progress through the lens of nominal GDP is a false dictum. The Center for Policy Dialogue (CPD) in its post-budget analysis argued that the recent GDP growth of Bangladesh is a sort of ‘economic illusion’ in the sense that the growth has failed to create employment opportunity for its mass population. The growing economy has benefited only a certain quarter of the total population, particularly the elites. This group has materialized benefits from the growing share of the economy using the loopholes of the existing legal system. As a result, a large part of their wealth remains undisclosed, which has been deposited in banks in foreign countries. It has been reported that deposits from Bangladesh in Swiss banks have increased on average 20 percent every year since 2013. Over the years, Bangladesh has lost between US$6 and 9 billion to illegal money outflow.3 The drain of local funds to foreign countries surely reduces local investment, and hence, the opportunity for employment. Despite nominal GDP grows at a moderate rate, the benefits of the growth remain out of reach for its teeming millions. Institutions are the prerequisites of growth; or at least, the growth itself leads to a better set of institutions. If the first proposition remains valid, Bangladesh is surely growing at a pace much less than its real potential, which can be attributed to institutional failure. The ongoing growth momentum in the absence of quality institutions is likely to be halted in the future once the marginal efficiency of current growth drivers diminishes. If

62 

M. D. MIAH AND Y. SUZUKI

the second axiom is considered more rational, the country has failed to elevate the accompanying and supporting intuitional quality parallel to growth. In either case, long-term GDP growth rate will suffer if these anomalies are not addressed on a priority basis.

3.7   Conclusion Economic performance of any country depends on various economic and political factors. As a result, the development theories are diverse in nature and their goodness-to-fit varies across countries. This chapter has attempted to critically analyze the leading development theories in the context of Bangladesh. Bifurcating the elements that affect economic activity into two sets—economic subsystem and institutional subsystem— this chapter shows that contemporary development theories focus heavily on economic subsystem to explain the economic backwardness in Bangladesh while neglecting institutional variables. In particular, a growing body of literature has emerged to link agrarian constraint and economic performance in developing countries. While we do not neglect the importance of agriculture, we have some reservations to rank the primary sector as the most promising way for a structural shift. Resorting to Lewis’s dual-sector model of developing economies, we have argued that a huge labor force employed in the primary sector is basically subsistence labor. Unless they can be pulled out and employed in a more productive sector, economic takeoff is unlikely. This requires a vibrant and sustained industrial sector and a capitalist class. We then refute various theories of industrial development in the context of Bangladesh and argue that unless it is ensured that each is entitled to receive what he earns and also earning is linearly linked to efforts, Gerschenkronian ‘tension’ might not create a real impetus to change. There is no scope to deny that savings, investment, capital formation, and infrastructure building contribute to the development of a country. At the same time, we should focus on the elements that encourage people to save and invest. These are obviously the institutional settings neglecting which may turn the contemporary theories of development unrealistic and incomplete. This, however, requires a proper analysis on the adverse consequences of institutional malaise and the mechanisms by which these consequences can be mitigated. The next chapter will shed more light on these issues.

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

63

Notes 1. Ban Ki-moon, Biswal shower praises on Hasina, The Daily Star, March 8, 2015. 2. Steady state may be different for two countries, depending on the magnitude of savings over capital requirement. Thus, the convergence here is called the conditional convergence. 3. The Daily Prothom Alo, June 24, 2016; and May 03, 2017.

References Adelman, I. (1984). Beyond export-led growth. World Development, 12(9), 937–949. Adnan, S. (1999). Agrarian Structure and Agriculture Growth Trends in Bangladesh: the Political Economy of Technological Change and Policy Interventions. In R. Ben, H.-W. Barbara, & B. Sugata (Eds.), Sonar Bangla? Agriculture Growth and Agrarian Change in West Bengal and Bangladesh (pp. 177–228). New Delhi: Sage Publications. Alauddin, M., & Tisdell, C. (1995). Labor absorption and agricultural development: Bangladesh’s experience and predicament. World Development, 23(2), 281–297. Ali, A. (1996). On Formalization of Bangladesh’s Economy. In A. Ali, F. Islam, & R. Kuddus (Eds.), Development Issues of Bangladesh (pp. 142–157). Dhaka: University Press Limited. Ali, A. M. S. (2007). Population pressure, agricultural intensification and changes in rural systems in Bangladesh. Geoforum, 38(4), 720–738. Asian Development Bank. (2017). Basic Statistics 2017. Asian Development Bank. Retrieved from https://www.adb.org/publications/basic-statistics-2017 Barro, R.  J. (1991). Economic Growth in a Cross Section of Countries. The Quarterly Journal of Economics, 106(2), 407–443. Bethell, T. (1999). The Noblest Triumph: Property and Prosperity Through the Ages. Palgrave Macmillan. Chakravarty, S. (1979). On the Question of Home Market and Prospects for Indian Growth. Economic and Political Weekly, 14(30/32), 1229–1242. Chowdhury, O., & Shahabuddin, Q. (1992). A Study of Food Situation and Outlook of Asia: Country Report on Bangladesh. Bangladesh Institute of Development Studies. Easterly, W. (2002). The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics. MIT Press. Elster, J. (1986). An Introduction to Karl Marx. Cambridge University Press. Everhart, S.  S., & Sumlinski, M.  A. (2001). Trends in Private Investment in Developing Countries: Statistics for 1970–2000 and the Impact on Private

64 

M. D. MIAH AND Y. SUZUKI

Investment of Corruption and the Quality of Public Investment, IFC Discussion Paper No. 44. Washington, DC: World Bank and the International Finance Corporation Faaland, J., & Parkinson, J.  (1976). Bangladesh: The Test Case for Development. London: C Hurst & Co Publishers. Faruqee, R. (1998). Bangladesh agriculture in the 21st century. Dhaka: University Press Ltd. Filmer, D. (2007). If you build it, will they come? School availability and school enrolment in 21 poor countries. The Journal of Development Studies, 43(5), 901–928. Gerschenkron, A. (1962). Economic Backwardness in Historical Perspective: A Book of Essays. Belknap Press of Harvard University Press. Hayami, Y. (2001). Development Economics  : From the Poverty to the Wealth of Nations: From the Poverty to the Wealth of Nations. Oxford University Press. Hirschman, A.  O. (1958). The Strategy of Economic Development. New Haven: Yale University Press. Hossain, M. (1991). Agriculture in Bangladesh: Performance, Problems, and Prospects. Dhaka: University Press Ltd. Hossain, M. A. (1996). Macroeconomic issues and policies: the case of Bangladesh. New Delhi: Sage Publications. Hossain, Mahabub. (1998). Nature and impact of the green revolution in Bangladesh. Research Report No. 67, International Food Policy Research Institute, Washington, DC. Hossain, M. A., & Rashid, S. (1996). In quest of development: the political economy of South Asia. Dhaka: University Press Limited. Huq, M., & Love, J. (2000). Strategies for Industrialisation: The Case of Bangladesh. Dhaka: University Press Limited. Khan, A.  R., & Hossain, M. (1989). Strategy of Development in Bangladesh. Springer. Khan, M.  H. (2004). State Failure in Developing Countries, and Institutional Reform Strategies. In B. Tungodden, N. H. Stern, & I. Kolstad (Eds.), Toward Pro-poor Policies: Aid, Institutions, and Globalization. World Bank Publications. King, R.  G., & Rebelo, S.  T. (1993). Transitional Dynamics and Economic Growth in the Neoclassical Model. The American Economic Review, 83(4), 908–931. Lewis, A. (1954). Economic Development with Unlimited Supplies of Labour. Manchester School of Economic and Social Studies, 22(2), 139–191. Lucas, R. E. (1990). Why Doesn’t Capital Flow from Rich to Poor Countries? The American Economic Review, 80(2), 92–96. Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A Contribution to the Empirics of Economic Growth. The Quarterly Journal of Economics, 107(2), 407–437.

  THE DEVELOPMENT DISCOURSE IN THE CONTEXT OF BANGLADESH… 

65

Mozumder, P., & Marathe, A. (2007). Causality relationship between electricity consumption and GDP in Bangladesh. Energy Policy, 35(1), 395–402. Muhith, A. M. A. (1999). Bangladesh in the twenty-first century: towards an industrial society. Dhaka: University Press Ltd. North, D. C. (1981). Structure and change in economic history. W W Norton. Nurkse, R. (1958). Problems of Capital Formation in Underdeveloped Countries. Oxford: Blackwell Publishing. Osmani, S. R., & Sen, B. (2011). Inequality in Rural Bangladesh in the 2000s: Trends and Causes. The Bangladesh Development Studies, 34(4), 1–36. Palmer-Jones, R. (1999). Slowdown in Agricultural Growth in Bangladesh: Neither a Good Description Nor a Good to Give. In R. Ben, B. Barbara, & B. Sugata (Eds.), Sonar Bangla? Agriculture Growth and Agrarian Change in West Bengal and Bangladesh (pp. 92–136). New Delhi: Sage Publications. Rahman, M., & Bakht, Z. (1997). Constraints to Industrial Development: Recent Reforms and Future Directions. In M. Quibria (Ed.), The Bangladesh Economy in Transition (pp. 77–113). Dhaka: University Press Limited. Rosenstein-Rodan, P.  N. (1943). Problems of Industrialisation of Eastern and South-Eastern Europe. The Economic Journal, 53(210/211), 202–211. Sachs, J.  D. (2005). The End of Poverty: Economic Possibilities for Our Time. A Perigee Book/Penguin Group. Shahabuddin, Q. (1999). Why is Agricultural Growth Uneven? Class and the Agrarian Surplus in Bangladesh. In B.  Rogaly, B.  Hariss-White, & S.  Bose (Eds.), Sonar Bangla? Agriculture Growth and Agrarian Change in West Bengal and Bangladesh (pp. 147–176). New Delhi: Sage Publications. Solow, R. (1956). Contribution to the Theory of Economic Growth. The Quarterly Journal of Economics, 70(1), 65–94. Solow, R. M. (1957). Technical Change and the Aggregate Production Function. The Review of Economics and Statistics, 39(3), 312–320. Storm, S. (1995). On the role of agriculture in India’s longer-term development strategy. Cambridge Journal of Economics, 19(6), 761–788. Vogel, S. J. (1994). Structural Change in Agriculture: Production Linkages and Agricultural Demand-Led Industrializaiton. Oxford Economic Papers, 46(1), 136–156. World Development Indicators | Data. (n.d.). Retrieved June 16, 2018, from https://data.worldbank.org/products/wdi

CHAPTER 4

Political Origin of State Weakness

4.1   Introduction A general framework for analyzing political institutions and their effects on resource allocation in a society has been set out in Chap. 2. Contrasting to the new institutional or functionalist theory of property rights, we have argued that the evolution of institutions and their continuity can be attributed to the interaction between state’s capacity and business power. Society in general, and business community in particular, would like to lead the evolution of new rights or the change in existing rights if the new form of property rights pays them off. Implementation of these changes, however, depends on the state’s power. A week state needs support from different strata of society for political survival and is likely to endorse these changes even if they are welfare-reducing overall. In contrast, a strong state can avert such pressure for the benefits of society. On the other hand, if state initiates new rights or changes the existing rights for the greater social benefits that often create a losing segment, implementation of this change depends on the cost the losing segment can impose on the initiator. If the losers can impose a substantial political cost on the ruling incumbent, such a structure of right is unlikely to emerge. Thus, state capacity has a lot of important social implications as far as the allocative efficiency of resources is concerned.

© The Author(s) 2018 M. D. Miah, Y. Suzuki, Power, Property Rights, and Economic Development, https://doi.org/10.1007/978-981-13-2763-6_4

67

68 

M. D. MIAH AND Y. SUZUKI

As argued in Chap. 2, the basic determinants of state capacity include its power to penetrate the society, regulate social relationships, extract resources, and allocate resources in determined ways. Migdal (1988: 5) argues, pointing that third world countries have demonstrated impressive capabilities in terms of penetrating the society, shown by their courage and capabilities to decolonize the country. However, they have remained incapable or weak in terms of regulating social relationships and also appropriating resources in a determined way. Lewis (1966) offers a rough estimate of the minimal expenditure required by third world nations to fulfill their basic demands. A state will need to spend at least 20 percent of its GDP to build the means necessary to gain access to the population. Migdal (1988) argues that Lewis’s estimation does not include expenditure for armed forces and debt repayment, which are also critical for third world countries. Including expenditures of these elements increases the figure to about 30 percent. In light of these parameters, the magnitude of social control of state over society can be assessed. In 2016, the total budgeted expenditure of Bangladesh accounted for little more than 15 percent of GDP, which is half of the standard level. Ideally, this expenditure should be met from revenues collected from taxes. A government that can meet this goal can claim a good control over society.1 Tax revenues never exceeded nine percent of GDP in Bangladesh. These two indicators show, roughly though, that the control of the state over society is poor. However, these estimations are not the ideal parameters to assess the degree of state capacity. Legitimacy crisis of a particular regime exposes its weaknesses, featured by the state’s incapacity to provide basic requirements of the society, which can be attributed to the lack of ability to collect resources in a legitimate way. Coicaud (2002) defines legitimacy of a regime as the right to govern society, which can be earned through securing necessary consent. He further argues that the right must accompany the reciprocal respect from contestants. Lack of corresponding reciprocal respect jeopardizes the right of the incumbent. This, in turn, may prompt political parties to seek legitimacy from society, even sometimes compromising the fundamental values and philosophy on which their political ideology is based. From this analytical view, this chapter examines the capacity of Bangladesh as a state. In so doing, it illustrates a brief historical analysis of political underpinnings, particularly the structure and ideology of political parties, to articulate the degree of state capacity.

  POLITICAL ORIGIN OF STATE WEAKNESS 

69

4.2   1971–1990: Authoritarian Dominance and the Legitimacy Crisis The current sociopolitical structure of Bangladesh did not emerge from a vacuum; but rather, the British colonial hegemony had a lasting impact on shaping the modern politics and institutional structure in Bangladesh. The colonizers ruled the Indian subcontinent (consisting of Bangladesh, India, and Pakistan) for almost two centuries (1757–1947). British were few in number in the subcontinent, and thus, required local alliance for their survival. The colonial rulers formed alliance with the local Zamindars (landlords) to collect revenue and implemented most of their rules mediated through the Zamindar class. The colonizers assigned private property rights to the Zamindars of Bengal by enacting the Permanent Settlement Act of 1793. The Act empowered Zamindars to collect revenue from the cultivators by any means, even sometimes by applying brutal coercion. Moreover, a sunset law was established through which farmers’ property was auctioned off when they failed to pay the arrear revenue before the sunset of a predetermined day. Zamindars were subsequently empowered by the inauguration of Regulation 7 in 1799, which was commonly known as the Law of Distraint. This law granted them the authority to distrain crops for arrears of rents. Furthermore, eviction of tenants from land was legalized by the Law of Eviction in 1812. Bose and Jalal (2011) report that the entire period from the late eighteenth century to the mid-nineteenth century was marked by revenue and rent offensives, both by colonizers and the Zamindars. The colonizers were ousted from the subcontinent; however, the local landlords remained in place with their enormous influence on politics and business. Following the end of colonial rule in 1947, the subcontinent divided into two separate states—India and Pakistan (Pakistan consisted of East and West). Even if initial administrative and bureaucratic constructs between India and Pakistan were almost similar, though not thoroughly alike, subsequent policies, however, diverged them through what Jalal (1995) calls the political economy of development versus defense. India was eager to focus on economic development, utilizing its limited available industrial infrastructure and administrative mechanisms developed and built during the British regime, whereas the Pakistani administration diverted its attention from economic progress to building its military prowess by dint of government control on bounties to protect the interest of the emerging bourgeois class. This tendency was reflected in the early period of the political history of Bangladesh.

70 

M. D. MIAH AND Y. SUZUKI

The Awami League (AL) made all efforts to emerge as a political party from Bengal since the early 1950s, but was not able to contribute significantly to protect the interests of East Pakistan. A fundamental weakness of the AL was that its leadership was composed largely of lower-middle-class, village-born landowners who worked as Zamindars during the British tenure. As a result, it was not until 1970 that the AL emerged as a strong political platform and the party was able to claim a landslide victory in the National Assembly and Provincial Election. This strength of organizing the party under the leadership of Sheikh Mujibur Rahman (henceforth Mujib) eased the process for the AL to form the first government of independent Bangladesh. The first year of the AL government was a grand success as Mujib was able to present the nation a constitution (Hakim 2000). In line with this trend, a positive expectation was formed about Mujib’s charismatic leadership capability. It was believed that a war-ravaged economy can be remodeled in the direction of success and prosperity. However, this expectation eventually began to fade when the strong state started to exploit a weak society instead of employing its capacity to reunite the nation. Apparently, Mujib failed to serve the nation parallel to his ideology and commitment shown during wartime. In fact, these two personal traits of Mujib inspired the general public to fight during the liberation of the country. Hakim (2000) notes that deterioration of law and order, increase in corruption at the top rungs, and gradual mismanagement of the economy took their highest toll within the first few years of independence. Consequently, ideological conflict emerged as a serious crisis within the AL. The first of such ideological conflicts came to light when a faction of the AL student wing, the Student League (SL), openly criticized the AL because of its deviation from its prewar commitment to rebuild Bangladesh as a socialist state. On the other hand, a separatist group started chanting a slogan—‘scientific socialism’—parallel to Marxism and revolution. This split was soon followed by another split in the AL-affiliated Mukti Juddah Songsad (association of freedom fighters), and also the AL labor wing, Sramik League (labor union). They jointly formed the Jatio Samajtantrik Dal (JSD, national socialist party). On the other front, the National Awami Party (NAP), led by Bhashani, forged an electoral alliance and announced Bhashani’s candidacy in the next parliamentary election. The NAP not only disliked Mujib’s secularism and pro-Indian imperialist ideology but also demanded Islamic socialism (Jahan 1973). Moreover, Tajuddin Ahmed, the prime minister, opposed Mujib’s imperialism and raised his

  POLITICAL ORIGIN OF STATE WEAKNESS 

71

voice in favor of socialism. However, Syed Nazrul Islam, deputy leader of the parliament who was also a member of the constitutional committee, along with Mostaque Ahmed, the foreign minister, increasingly pressed Mujib to follow a model of mixed economy. At the height of tension in 1974, Mujib forced Tajuddin Ahmed to resign. Captain Monsur Ali later succeeded Tajuddin Ahmed. The growing discontent among the top leaders gradually escalated, leading to the ideological bipolarization between Mujib and his faithful associates. The tension finally eased out at the cost of brutal assassinations, when Mujib and his family members were killed in August 1975. In the following November, four top leaders, including Nazrul Islam, Tajuddin Ahmed, and Captain Monsur Ali, were killed while imprisoned in jail. Consequently, not only the AL but also the country as a whole were stunned by a leadership crisis. The leadership crisis further intensified due to the fact that Mujib did not allow any major political party to emerge except some smaller factions of the AL. He implanted a one-party system, yielding supreme power to the head of the party through a constitutional amendment that banned activities of other political parties except his one. This situation created a leadership vacuum, paving the way for the military to emerge as political savior. As a result, General Ziaur Rahman established a bureaucratic military state in 1976 and formed his own party (Bangladesh Nationalist Party, BNP) in1978 to provide his regime a civilian flavor. General Zia recruited members from many social strata, including politicians, bureaucrats, retired military officers, freedom fighters, and also those who opposed the liberation war in 1971, leftists as well as religious fundamentalists (Hossain 2000). Needless to say, a party comprising so many factions can hardly avoid ideological polarizations and conflicts. Unlike his predecessors, General Zia showed leniency toward religious factions, some of which opposed the liberation war. Amidst this fragile political environment, he changed the constitutional principles from secularism to Islamic values. Such a strategy for merely political survival resulted in discontent among freedom fighters. Furthermore, the regimes’ task of legitimizing its rule became tough when several abortive military coups were attempted against General Zia. He was a leader trained in the military barracks and knew how to avoid such a chaos. General Zia’s towering personality was a powerful tool to manage internal feuds in the broader question of national legitimacy. However, the country had to pay for this leniency in the sense that the search of legitimacy meant that he

72 

M. D. MIAH AND Y. SUZUKI

utilized economic means as bait to make factions hostage. Ahmed S. (2000: 112) describes: “[T]he economy stagnated while Zia allowed corruption to flourish, both within and outside the ranks of government, so that its beneficiaries would be dependent on him and hence vulnerable to manipulation.” Notwithstanding his compromise with corruption, General Zia was able to form a strong state, implanting fine-tune checks and balances on bureaucrats simply by recruiting military personnel in the civilian posts. For example, by January 1980, nine military officials were holding senior civilian posts, while 14 out of 20 district superintendents of police were military personnel. Obviously, this strategy helped halting civilian corruption to a certain extent, but at the military level, patronage politics was rampant. State-owned enterprises (SOEs) became the primary means to sustain the patronage politics. General Zia initiated some steps to interfere and mitigate this setback. As a first step, he started denationalizing state-owned enterprises. The effort to combat corruption among the civil bureaucrats, on the one hand, and denationalization of SOEs, on the other, paid off in terms of economic growth, price stability, and combating inflation (Maniruzzaman 1977). General Zia wanted to retain this momentum of economic success, which required minimizing military intervention in the politics. However, this strategy was not easy to execute because any step toward this direction would definitely create resentment among top military personnel. Despite such a threat, General Zia initiated some strategies and was successful, but for a very short span of time. After several unsuccessful attempts, he was assassinated by military junta in 1981 to end the first military government in Bangladesh. Leadership crisis as well as ideological divergence resurfaced once again after General Zia’s assassination, which was evident in the question as to who should succeed Zia as the head of the state. Even though Justice Sattar succeeded instantly, he was a 75-year-old veteran and was not quite fit physically. His low probability of survival in the long run prompted some key persons—including the then prime minister, secretary general of BNP, speaker of the parliament, and a non-BNP minister in charge of the ministry of agriculture who was also a veteran freedom fighter—to contest for presidency (Hossain, G. 2000). However, in a council meeting, Justice Sattar was nominated and elected as the president. Sattar was not capable of resolving factional feuds in and out of the government. One of General Zia’s pre-election manifestos was to restore

  POLITICAL ORIGIN OF STATE WEAKNESS 

73

the parliamentary system by abolishing the existing presidential system. Some leaders who defected from the AL, and other similar-minded smaller factions, raised their voice strongly in favor of a parliamentary system. This was opposed by the majority rightists. Conflicts also heightened over the issue of denationalization of key industries, banks, insurance, and so on. Those who were unable to make their voice heard left the party and joined the Democratic League; some of them would return back later. Those who joined the BNP at the time of General Zia from National Awami Party (NAP, Bhashani) started to maintain close liaisons with their former leaders. Lobbying and counter lobbying were the usual characters of the BNP at that time. Sattar was so weak in power that he could not even constitute a cabinet of his choice (Hossain, G. 2000). Besides, he was also facing threats from the military on the issue of controlling corruption. When the pressure intensified, especially from the Army Chief of Staff, General Ershad, the president dissolved his cabinet to neutralize the feelings of the military and reshuffled the cabinet. Moreover, a National Security Council, which included three chiefs of military services, was formed as the highest policymaking body of the state. The new cabinet soon appeared as a dilemma for the president because the new reform measures fell short of the military’s expectations, on the one hand. On the other, some dedicated leaders who were the close associates of General Zia did not find any expected position in the new cabinet, which ignited resentment among the dissident groups. Internal feud turned into a grave crisis. Sattar’s struggle to unite his party members, resolving internal feuds and organizing them in a common political platform, took his attention away from other crucial aspects of the country. As a result, corruption increased rampantly in every sphere of the economy. This facilitated General Ershad to assume power as Chief Military Law Administration (CMLA) by a bloodless coup in 1982, ending the period of civil rule. After the coup, a major question emerged as to whether the military government would be able to provide a cohesive leadership to a politically fragile nation. On the other hand, whether the military government can come to terms with the country’s enormous economic and social problems already erupted during the preceding regimes was a legitimate concern. Particularly, the military takeover ushered a mounting challenge as to how the national political institutions should be designed such that it will ensure effective participation of the military as well as various social groups.

74 

M. D. MIAH AND Y. SUZUKI

Unlike his predecessors, General Ershad initiated a puritan move in which dozens of top cabinet ministers of the erstwhile government, along with hundreds of bureaucrats, were arrested on charges of corruption. Moreover, some businessmen who had lobbied for making money by illegal means during the freewheeling days of General Zia were also arrested. The government justified this move as part of its all-out war against corruption as well as restoring norms and values in public life. Notable administrative reform measures adopted were the reduction of the number of ministries from 42 to 17 and directorates from 256 to 180. On the economic sphere, the new government adopted severe austerity measures, introduced a series of new laws to rationalize the tax structure, imposed a 15–30 percent tax on undeclared income, and streamlined credit supplies by nationalized banks and other financial institutions (Rahman, M. 1983). All of these measures were justified as part of the new regime’s ‘structural change’ in the economic and social order. Moreover, General Ershad continued denationalizing industries (which were nationalized during the Mujib period), returning them to their previous owners, and also limited the role of the public sector to the establishment of heavy industries, steel mills, fertilizer, and public utilities. These decisions helped reduce state burden resulting from continuous loss incurred by nationalized industries and mills to an amount of more than $250 million per year (Rahman, M. 1983). General Ershad’s starting was a good omen for Bangladesh compared to his previous regimes in the sense that he emphasized private sector–centric economic growth. However, his strategy could not satisfy opposition blocs—notably two separate groups, the left-center bloc of the AL led by Sheikh Hasina (Mujib’s daughter) and the rightist bloc of the BNP led by Khaleda Zia (wife of General Zia). Intense opposition erupted, led by these two blocs. They demanded the lift of the ban on political activities and withdrawal of martial law. Amidst this opposition, General Ershad assumed the office of the president while continuing his status as CMLA. To provide the military regime a civilian façade, General Ershad formed a political front, Jatiya Party (JP), with a mix of ideologies borrowed from both the AL and the BNP.  For example, like Mujib, he retained the presidential system while following General Zia’s religious-­ based ideology as well as Bangladeshi nationalism. However, a critical problem for General Ershad was to find politically experienced persons to lead the party. The AL was already settled with the core people who experienced politics with Mujib, starting from the

  POLITICAL ORIGIN OF STATE WEAKNESS 

75

Pakistan period, whereas the BNP comprised both military elites and civil politicians who emerged in postindependent Bangladesh. General Ershad, thus, tried to tap some core people from both parties, offering lucrative positions in the cabinet. He knew that political ideology is still at its infancy in Bangladesh. Thus, it would not be too difficult to attract some key personalities from opposition blocs. As a result, the BNP’s key political personalities such as Prime Minister Shah Aziz, former deputy prime minister Mouded Ahmed, and United Peoples Party Chief Kazi Zafar Ahmed joined the military cabinet. Similarly, some key AL leaders also joined the General Ershad cabinet, including onetime AL secretary general Mizanur Rahman Chowdhury. Departure of some key leaders from both the AL and the BNP signaled the inherent weakness of political parties in Bangladesh. Consequently, the threat they previously exerted to avert General Ershad’s prowess weakened enormously. General Ershad utilized this opportunity and maintained a close relationship with military coteries, still a big potential threat he had to encounter. At this stage, the military regime can be seen as a strong state in that the regime attempted to utilize military power to develop the country economically. However, it did not sustain for long. General Ershad wanted to give a proper economic role to the military power by constitutional amendment. Doing so would mean the perpetuation of military rule in Bangladesh. The opposition blocs opposed this move seriously. Moreover, they complained that such an expansion of military role would adversely affect the infant democracy of the country. Thus, the intrusion of the military in politics was viewed by the bureaucracy as a threat to the democratic politics of the country. At this point, the opposition parties  started to strengthen their power by forming a multiparty alliance. In 1984, two opposition parties—a 15-party alliance led by the AL and a 7-party alliance led by the BNP—emerged. The military ruler’s aspiration to build a strong state did not come to fruition at last. General Ershad failed to hold a general election despite making few attempts to do so. The opposition alliances refused to take part in the election on the ground that no election would be impartial while martial law is in force. Furthermore, the military ruler abrogated constitutional rights, including freedom of speech. A regime that lacks basic human and political rights cannot support the voting right of the people. General Ershad knew that military backing without people’s mandate is a fundamental weakness. Thus, he proposed to accommodate opposition camps, relaxing some provisions of martial law on the condition that

76 

M. D. MIAH AND Y. SUZUKI

they would participate in the election (Bertocci 1986). However, they boycotted the election. As a result, General Ershad reinstated those conditions which he had abrogated earlier. Keeping top leaders of both the AL and the BNP under house arrest, General Ershad arranged a showcasing referendum and claimed a landslide victory amidst forgery. In the face of both national and international pressure, General Ershad was forced to release two opposition party leaders from house arrest and lifted the ban on political activities at the beginning of 1986. At this chance, the opposition alliances, including the 15-party alliance and the 7-party alliance, announced a coordinated program to overthrow the military government unless there is an announcement of a fixed election date. Accordingly, General Ershad announced that a parliamentary election will be held in the middle of 1986. Even though both AL and BNP coalitions vowed not to take part in the election, the AL later deviated from its earlier promise and contested the election. As a result, the 7-party alliance was in clutch and continued opposing martial law. As expected, General Ershad’s party (JP) managed to form a parliamentary government, and the AL became the main opposition party. In a row, after few months, a presidential election was held after which General Ershad formed the civil government in an uncontested election. Even though the JP formed the parliamentary government with General Ershad as the president, the government faced opposition from both fronts. The AL opposed the government in the parliament, while the BNP held demonstrations in the street on a regular basis. The JP was in a great fix on how to ease the opposition out. Amidst this, the AL formed a united action opposition forum with 7-party alliance and Jamaat-e-Islami (JI), the only pro-Islamic political party in Bangladesh. The next three years were marked by severe violence, where the opposition tried to overthrow the military dictator, but he strived to remain in power. Hundreds of people had been killed during the confrontation between the united opposition front and the government before General Ershad resigned in 1990, which facilitated the way to a parliamentary democracy. The political history of Bangladesh since its independence until 1990 experienced a swinging pendulum. Democratic governments failed because no leader was able to unite the party under a common ideology. As a result, the power base of such a government fissured into several small factions. Top leaders tried to accommodate different ideologies and opinions, even sometimes sacrificing the country’s greater interest. Similarly, autocratic rulers faced a legitimacy crisis and were prompt to add some

  POLITICAL ORIGIN OF STATE WEAKNESS 

77

civil flavor. This proves that neither an autocratic regime nor a democratic ruler in the pre-1991 period in Bangladesh was able to establish a political party, and thereby a strong government to regulate the society.

4.3   1991–2008: Transition to a Fragile Democracy Transition to democracy through a parliamentary free and fair election was a crucial institutional change in the political history of Bangladesh. However, it is to be assessed if the mainstream political parties have been able to overcome the ideological crisis which plagued their respective regimes earlier. Of course, both the AL and the BNP can share the credit of bringing the military regime to an end thorough mobilizing mass agitation; however, the military dictator remained critically important in the politics of Bangladesh because the two major parties frequently required his support so much that the dictator was being able to demand unfair advantages from the ruling government. The first general election in democratic Bangladesh was held in 1991. Of the 300 seats contested directly from single-member constituencies, the BNP won 140 (31 percent of total vote casted), short of a majority but well ahead of other parties. The AL won 88 seats (28 percent vote), the JP 35, JI 18, and the remaining seats were shared by other small parties and independent contestants. Khaleda Zia was sworn in as prime minister and formed a cabinet constituting mostly of candidates who were ministers during the tenure of General Zia. However, in a presidential system of parliament, the prime minister is nothing but second to the acting president. The BNP promised in its election manifesto to continue with the presidential system whereas the AL wanted to restore the parliamentarian system. Like a stunt, the BNP changed its position and agreed to shift from a presidential system to a parliamentary system. The BNP put forward the constitutional amendment bill, which was passed by the majority vote. Eventually, Khaleda Zia became the head of the parliament. During the first few years of child-democracy, the country witnessed no major changes in the economic and political spheres. However, the difference between the major opposition parties and the government started to unveil once the former group demanded the appointment of a neutral caretaker government (NCG), which was believed inevitable for free and fair elections in the future. The opposition parties pressed their demand for a constitutional amendment to facilitate NCG. The BNP, which represented

78 

M. D. MIAH AND Y. SUZUKI

the majority in the parliament, was not interested in this demand. This was followed by the en masse resignation of all 147 members of the AL, JP, and JI from parliament in December 1994. The BNP responded by dissolving the parliament in November 1995 and held the national election in February 1996, which was boycotted by major opposition parties. The BNP won the uncontested election, but the country was heading toward an uncertain political future when opposition parties called for an indefinite noncooperation agitation. As the economy was approaching turmoil, government officers and employees, including the senior bureaucrats, issued an ultimatum to the BNP-led government to resign and hold free and fair elections or face an indefinite strike from the government employees. The government passed the 13th Amendment to the constitution to create an interim NCG. In the 1996 general election, which was held for the first time under the NCG, the AL won 37.47 percent vote (135 seats) and the BNP secured 33.34 percent vote (104 seats). The JP, on the other hand, secured the third position, winning 29 seats despite the party chairman, General Ershad, remaining imprisoned. Since the AL fell short of securing absolute majority to form a government, it invited the JP to join the government. The reward for the JP was evident when the Supreme Court granted General Ershad bail for 17 cases of corruption and misuse of power during his nine-year dictatorial regime (1981–1990). Protest against the new government intensified in early 1997 because of the government’s failure to manage the economy properly (Kochanek 1998). To add fuel to the fire, the JP withdrew its support from the government and declared itself to be the main opposition party. Taking advantage of the moment, the BNP made a coalition with the JP, JI, and another small faction to form a ‘four-party alliance’. The AL faced stiff opposition, but did not bend. The AL was the only party to be in power for a complete term (5 years). Obviously, the party could not fight well in 2001 general election because it was a competition between one (AL) and four (BNP, JP, JI, and Islami Oikya Jote). The four-party alliance won the general election and formed a coalition government. Some insights are to be noted from the political alliances in Bangladesh. First, the BNP was heavily criticized for having an alliance with JI because JI was against the liberation war. Thus, sharing power with that small faction means not only recognizing its importance in the politics even though it did not have a strong base but also increasing its bargaining capacity in the power-sharing coalition. In the 1996 general election, JI secured only

  POLITICAL ORIGIN OF STATE WEAKNESS 

79

two seats, whereas in 2001, they won 17 seats because of the coalition. Second, the BNP played a crucial role in bringing down General Ershad and put him in jail during its tenure. At odds with this tradition, the BNP later formed a coalition with the JP. The AL followed the same strategy before the 2006 general election and they first targeted General Ershad. Thus, the JP became a hot cake in the political market. General Ershad tried to utilize this opportunity, pressing the BNP to withdraw all his pending litigations filed in the past regimes. Else, he threatened to quit the four-party alliance. Instantly, four cases were dismissed within a month, proving him innocent. The court verdict surprised the country not by the acquittal of General Ershad from charges but by the speed of trial in resolving these cases, a rare happenstance in the history of Bangladesh. Ershad’s surprise, however, was not finished yet. He decided to quit the four-party alliance and made an alliance with the AL. The BNP was in power and the first retaliatory act was to declare that General Ershad’s contesting the upcoming general election was illegitimate because some litigations were still pending. The court verdict generated controversy because the chief justice who was appointed few months ago had a close link to the BNP-led alliance.2 General Ershad at last joined the AL to form an alliance. Forming alliance with the JP was a clear compromise of the AL’s long-­ standing secular ideology. However, a serious blow was still to come. Before the 2006 general election, the AL formed a coalition with one faction of the divided Islamic Oikya Jote (IOJ), another very crude religion-­ based small political faction, utterly obliterating its long-cherished stated ideology of secularism. The saddest episode was that IOJ made the AL hostage to accept its five-point pre-election demand. The conditions were subversive to the AL constitution and were disliked by its senior leaders. The election was not held in time. The primary element of discord between the AL and the BNP centered on who should be the chief adviser of NCG. The ruling BNP-led government selected acting president, Iajuddin Ahmed, as the chief. Since Iajuddin served as a BNP-nominated president, the opposition parties did not believe him to be neutral. To make the situation worse, four advisers of the Iajuddin-led NCG resigned in protest. Finally, the AL boycotted the elections scheduled to be held in January 2007. The two parties’ political stance led the country to the brink of civil war. The military intervened on January 11, 2007, and installed a second NCG under the leadership of a civilian, Dr. Fakhruddin Ahmed.

80 

M. D. MIAH AND Y. SUZUKI

The military-backed Fakhruddin NCG ruled the country for two years (2007–2008) and worked as an interim government instead of a caretaker government. The 2008 parliamentary election was perceived as free and fair by all domestic and international observers. The AL-led Grand Alliance won 262 seats and formed the government on January 6, 2009, with Sheikh Hasina as prime minister. Capitalizing on the advantage of two-­ thirds majority in the parliament, the AL brought a critical amendment to the constitution in regard to NCG.  Such a change, of course, was provoked by the previous NCG, which ruled the country for two years. The prime minister formed a special parliamentary committee to find a solution so that NCG, which is not mandated by the people, could not run the country for more than the period required for holding a general election. The committee proposed two changes, limiting the period for maximum 90 days for holding a general election, and abrogation of the NCG’s right to sign any foreign treaty. The Appellate Division of the Supreme Court accordingly declared the NCG unconstitutional. However, the 4–3 split decision recommended maintaining the NCG system with these changes. But to everyone’s surprise, the committee finally recommended the abolition of the NCG system. The same bill was produced before the parliament and was approved by two-thirds majority, enabling the 15th Amendment of the constitution. The next parliamentary election was organized under the auspices of the AL-backed government. The BNP and its allies demanded restoration of NCG, but it was of no avail. They predicted widespread vote rigging and decided to stay away from the election. The AL expected General Ershad–backed JP to contest in the election as a major opposition party, which may validate the election result. However, the JP refused to contest. Despite in good health, General Ershad was suddenly taken to the combined military hospital (CMH) and was not allowed to speak before the press or any outsiders. His wife, Raushan Ershad, was appointed as the chairman of the JP.  Under the leadership of Raushan Ershad, the JP ­contested the election as the major opposition party. Out of 300 seats, the AL won 234, of which 154 were uncontested. The above analysis of the political history of Bangladesh shows the power-sharing game played between and among political parties. In this game, both the AL and the BNP compete for factional alliance. In so doing, they shelter smaller factions which can never seek public mandate openly by their own. Because of this tradition, small political factions sometimes become successful in pressing the government to accept their demand,

  POLITICAL ORIGIN OF STATE WEAKNESS 

81

even if illegal in the eyes of law. Note that when General Ershad showed his consent to join the BNP, he was acquitted from four serious cases in a single month. Soon after this episode, his candidature was declared illegitimate because of his leniency toward the AL. Undoubtedly, General Ershad acted opportunistically and so did two frontline parties. This tradition indicates the inherent fragility of political parties of the country.

4.4   The Independence of Judiciary The discussion on the political institutions of Bangladesh postulates that all the political parties, regardless of their origins and history, suffer from ideological as well as legitimacy crises. A few instances have been presented that show that political parties compromise the country’s economic interest in an attempt to seek legitimacy. However, other branches of the state, including judiciary and executive, can avert attempts of legislature that are welfare-reducing. The strength of the judiciary depends on the extent to which it is free from interference from the executive and legislative members. It is highlighted in the earlier discussion that the military dictator, General Ershad, was acquitted from charges simply based on political consideration, which indicates that judicial decision can be maneuvered by the political muscle. In what follows, we analyze the verdict of Masdar Hossain and others v. Secretary, Ministry of Finance3 to portray executives’ unwillingness to create an independent judiciary. The plaintiff instituted the suit on the ground that Bangladesh Civil Service Order, 1980, purporting to incorporate ‘Judicial Service’ within the Bangladesh Civil Service (BCS) as one of the cadre services, is ultra vires4 of the constitution, and therefore, unconstitutional. Treating judges of subordinate courts as part of the Civil Service Cadre, which is under the auspices of the executive branch of the government, and subjecting them to any laws governing the employees of the executive government is ultra vires, and thereby, should be declared illegal. Articles 115 and 116 of the constitution require that the control and discipline of persons employed in the judicial services shall be vested in the president, who will exercise the power in consultation with the Supreme Court. The purpose is to ensure independence, which is stated in the Article 116. The article states that “subject to provisions of the Constitution, all persons employed in the judicial service and all magistrates shall be independent in the exercise of their judicial functions.”

82 

M. D. MIAH AND Y. SUZUKI

The lawsuit was further inspired by the fact that under the existing institutional arrangement, the judiciary enjoyed very limited freedom. For instance, criminal courts are divided into three levels: lower, middle, and upper. In the case of lower criminal courts, the control on judges’ recruitment, promotion and transfer, and termination is vested in the executive branch. Judiciary has power only to monitor the justifiability of any verdicts issued by the lower criminal court. The same applies to the middle-­ level criminal courts. Only in the case of upper criminal courts, the judiciary has limited power for recruiting judges. However, their transfer is governed by the executive branch, but the executive branch does not have the power to terminate judges belonging to upper courts (Islam, R. 2014). The Supreme Court, thus, in its verdict, emphasized the importance of separating the judiciary from the executive to ensure de jure and de facto independence of all subordinate courts. The court further argued that the judiciary has been separately treated in the constitution, and thus, this branch of the state deserves clear independence. From this stance, the Supreme Court issued directives to the government to effect the separation of judiciary from the executive as per the provision of the constitution. The Supreme Court further specified a time limit and spelled out necessary steps for implementation of the directives. However, the issue of separation of judiciary from the executive is not new. The debate started in the late eighteenth century under the British rule, when the collector of a district was vested with the power of a magistrate and also of a judge. Following the partition of the Indian subcontinent, a bill for the separation of the judiciary from the executive was passed in 1957 in East Pakistan. After approval by the governor, it became a law. However, the law adopted a mysterious clause. It stated that the law shall come into force in such areas and on such dates as the provincial government may, by notification in the official gazette, specify on this behalf. The public notification was never gazetted (Ali 2006). After independence, the constitution of Bangladesh recognized the need for an independent judicial system, and thus, made necessary provisions for it. The constitution was further amended in 1975, emphasizing that all persons employed in the judicial services shall be independent in exercising their judicial function. However, the changes of political landscape in 1975 delayed the separation process. Again, in 1987, a bill was prepared and presented before the parliament to undertake necessary steps for separation so that constitutional requirement is fulfilled. The bill was hailed at the parliament by one group while the opposition group disparaged, leading to the ultimate failure of the process.

  POLITICAL ORIGIN OF STATE WEAKNESS 

83

There was no progress on the separation issue until the Appellate division of the Supreme Court in its verdict on Masdar Hossain and others v. Secretary, Ministry of Finance, issued 12-point directives to the government for the separation of the judiciary from the executive in 1999. These directives were also accompanied by a clear roadmap for their implementation. There was no ambiguity in the court’s decision and the government knew well about the implementation process. Despite this, the AL-backed government, which was in power at that time, did not mobilize the separation process. On the contrary, the government requested extension of the deadline seven times during its last 1.5-year tenure. The caretaker government that was followed by the AL government sought extension thrice. The BNP-led coalition government, which succeeded the caretaker government, requested time extension 12 times. The Supreme Court then expressed its displeasure when further extension was sought for the 23rd time in October 2005. The court stated that it wanted to see the implementation of the 12-point directives. The court further argued that the request for frequent time extension without any visible progress of the separation process is equivalent to contempt of the court. Thus, the 23rd request for time extension was turned down. The court, instead, fixed February 1, 2006, for hearing of the contempt case against nine secretaries. On April 3, 2006, the Supreme Court issued its rule on the contempt hearing, asking the principal secretary of the prime minister, along with three other secretaries, to show cause as to why they should not be prosecuted for contempt of court for not complying with the 12-point directives. The secretaries were not prosecuted at all. The interim caretaker government, after assuming office in October 2006, declared the separation of the judiciary from the executive in January 2007. The NCG further enacted a set of rules to implement this separation, which was completed in July 2007, enabling the judiciary to function independently. However, this reform is yet to be implemented in the lower judiciary, which remains largely under the control of the executive (Ali 2006). In fact, this has been the center of argument between the judiciary and the executive for a long time. Meanwhile, the government passed the Bangladesh Judicial Service Rules 2017, which entitles the president to preserve the right to appointment, administration, and removal of lower court judges (Riaz 2018). This, perhaps, has led to the biggest dispute between the legislature and the apex judicial body of the country.

84 

M. D. MIAH AND Y. SUZUKI

In September 2014, the parliament by virtue of its two-thirds majority passed a controversial amendment to the constitution. The amendment was related to the provision of the removal of judges on the ground of incapacity or misconduct. It was stated in the constitution that the chief justice-led Supreme Judicial Council preserves the right to remove judges due to their physical or mental incapacity or other misconducts as the council may find appropriate. The parliament through the 16th Amendment abolishes this power of the supreme judicial council and empowers the parliament to impeach judges of the Supreme Court. In November 2014, nine Supreme Court lawyers filed a writ petition on the validity of the amendment. The HC ruled in May 2016 that the amendment is unconstitutional. The court further stated that the amendment was “against the principles of the separation of state power and the independence of the judiciary” (Riaz 2017). The government filed an appeal challenging the decision, and the Supreme Court upheld the high court verdict. The tension between the judiciary and the legislature skyrocketed following this verdict, which resulted in the resignation of the chief justice, S.  K. Sinha, and his eventual departure from the country. This event proves that the judicial attempt to maintain its independence proved to be futile.

4.5   Conclusion Bangladesh accomplished two consecutive political landmarks which showed its capacity to mobilize social power as well as penetrate society. The first of such milestones was achieved by decolonizing undivided India from the British prowess in 1947. The second one was an all-out effort to liberate the country from Pakistani oppression in 1971. In this sense, Bangladesh showed promising capacity to emerge as a strong state. This possibility remained valid at least in the first few years following the independence. Sheikh Mujib, who led the liberation war, became the first president of independent Bangladesh. The war-ravaged society was very weak. Mujib was sympathetic to the sacrifice and effort put forth by the mass population during the liberation war and wanted to provide the nation the maximum benefit with whatever resources available. However, too much power concentration at the center provided the government with the means to squeeze the society. It did not take long for the Mujib government to experience ideological rifts between and among different factions within the government, which finally led the regime toward a brutal and unwanted end.

  POLITICAL ORIGIN OF STATE WEAKNESS 

85

The next two decades of Bangladesh politics was characterized by a swinging pendulum. Civil government was frequently interrupted by military intervention. Democratic governments survived for only a short period of time due mainly to the lack of capable civil leadership. Military utilized this leadership vacuum as a legitimate ground to directly intervene in politics. As a result, few military dictators ruled most of the first two decades of independent Bangladesh. They definitely lacked political experience required for governing  a highly populated country with limited available resources. Thus, the dictators formed political parties to provide their regimes a civilian flavor. However, there were only few experienced political leaders who could take charge of different portfolios of government. Thus, military-backed political parties tempted politicians from opposition blocks to join them. Switching among and between parties was a common trait of many politicians during that period. No single party possessed sufficient political power to hold its founding ideology. Founding ideology was compromised time and again in an attempt to seek support from various small factions of the society, which revealed an apparent legitimacy crisis of leading political parties. Transition to democracy in 1991 heralded a positive change for the swinging politics of Bangladesh. Democratic experience, however, has failed to bring any notable changes as far as political stability of the country is concerned. Apparently, the military was not in the scene, but small political and other social factions gained added bargaining capacity due to power-sharing coalitions with frontline political parties. Unfair advantages were offered in exchange, which most of the time turned subversive to the founding philosophy of the country. Although the judiciary showed sincerity and occasionally intervened in the process, separation of the judiciary from the executives still remains unexecuted.

Notes 1. With the assumption that public expenditure should be met by revenues collected from public. 2. “Hasina sees people’s victory as Aziz goes”, The Daily Star, November 24, 2006. 3. 52 Dhaka Law Report (DLR), 2000 (AD). 4. A Latin word which literally means ‘beyond the power’. Constitution gives state government various powers; to go beyond this power is ‘ultra vires’.

86 

M. D. MIAH AND Y. SUZUKI

References Ahmed, S. (2000). Politics in Bangladesh: The Paradox of Military Intervention. In V.  G. Grover (Ed), Government and Politics of Asian Countries Vol. 2 (pp. 97–128). New Delhi: Deep and Deep Publications Pvt. Ltd. Ali, M.  M. (2006, February 16). Judicial separation issue lingers on. The Daily Star. Bertocci, P. J. (1986). Bangladesh in 1985: Resolute against the Storms. Asian Survey, 26(2), 224–234. Bose, S., & Jalal, A. (2011). Modern South Asia: History, Culture, Political Economy. Routledge. Coicaud, J.-M. (2002). Legitimacy and Politics: A Contribution to the Study of Political Right and Political Responsibility. Cambridge University Press. Hakim, M. (2000). Parliamentary Election in Bangladesh: A Comparative Analysis. In V.  G. Grover (Ed.), Government and Politics of Asian Countries, Vol. 2 (pp. 147–164). New Delhi: Deep and Deep Publications Pvt. Ltd. Hossain, G. (2000). From Military to Military: BNP’s Persistent Factionalism and Failure of Civilian Succession in Bangladesh. In V. G. Grover (Ed.), Government and Politics of Asian Countries, Vol. 2 (pp. 129–146). New Delhi: Deep and Deep Publications Pvt. Ltd. Jahan, R. (1973). Bangladesh in 1972: Nation Building in a New State. Asian Survey, 13(2), 199–210. Jalal, A. (1995). Democracy and Authoritarianism in South Asia: A Comparative and Historical Perspective. Cambridge University Press. Kochanek, S.  A. (1998). Bangladesh in 1997: The Honeymoon is Over. Asian Survey, 38(2), 135–141. Lewis, A. (1966). Development Planning: The Essentials of Economic Growth. New York: Harper and Row. Maniruzzaman, T. (1977). Bangladesh in 1976: Struggle for Survival as an Independent State. Asian Survey, 17(2), 191–200. Migdal, J. (1988). Strong Societies and Weak States: State-Society Relations and State Capabilities in the Third World. Princeton, NJ: Princeton University Press. Islam, Rafiqul. (2014, March 10). Independence of the judiciary- the Masdar case. The Daily Star. Rahman, M. A. (1983). Bangladesh in 1982: Beginnings of the Second Decade. Asian Survey, 23(2), 149–157. Riaz, A. (2017, August 7). 16th Amendment Struck Down: More than Just a Verdict. The Daily Star. Riaz, A. (2018, January 1). 2017: What it means for 2018. The Daily Star.

CHAPTER 5

Patron-Client Politics and the Rise of the Business Class

5.1   Introduction Our analysis of the political history of Bangladesh, enumerated in Chap. 4, shows the sources as well as the magnitude of state weakness. Specially, all the rulers, civil or military, suffered from legitimacy crisis, which forced them to seek support from different social strata. The business community was one of the primary targets. Political entities frequently resorted to this segment of the society in an attempt to seek support for their respective regimes. As mentioned earlier, social repercussion of the state-business interaction depends on the relative power the business community holds compared to the state. In a weak state, the emergence of a concentrated and powerful business community means that the seemingly growth-­ retarding outcomes of rent seeking would be pervasive because a small and strong business group can hold the state hostage and demand rent that is unproductive. Since the state does not possess enough capacity to turn down the demand, rent seeking survives. Thus, it is essential to assess the nature of the business class to sufficiently understand its bargaining power, and thereby, the structure of resource distribution. This chapter aims to accomplish this objective. Parallel to Chap. 4, which sketches the political history of Bangladesh, the current chapter portrays the development of business groups and their bargaining power in the society.

© The Author(s) 2018 M. D. Miah, Y. Suzuki, Power, Property Rights, and Economic Development, https://doi.org/10.1007/978-981-13-2763-6_5

87

88 

M. D. MIAH AND Y. SUZUKI

In so doing, we analyze industrial policies adopted in different regimes that have either helped private enterprises grow or at least provided a fair ground to advance their activities. Such an analysis will be useful to understand the pattern of resource distribution, given the power shared between political parties and the business community. The chapter is structured as follows: Section 5.2 examines the development of the business sector during the Pakistan regime, which lasted from 1947 to 1971. Section 5.3 analyzes industrial development in the period 1971–1990. During this period, the country’s political environment experienced serious swinging and so did the business sector. It has been shown that most businesses have grown parallel to the development of political institutions in independent Bangladesh. However, in the post-1991 democratic era, the interest of politics and business is found to have collided. This has resulted in resource distribution in a particular pattern which does not seem to be conducive to economic development. This issue is elaborated in Sect. 5.4. Section 5.5 offers an example showing the nature and effects of patronage politics. This is followed by a brief conclusion.

5.2   Industrial Development Before Independence Bengal was considered the wealthiest state in the Mughal Empire because of her rich natural resources, notably arable lands, raw agricultural materials, and fine manufacturing goods, including textiles. This richness, perhaps, attracted many Europeans to look for their fortunes in this fertile land. As a result, Bengal was conquered by the British through a bloodless coup in 1757, ending the reign of last Mughal emperor of Bengal. The British East India Company established monopoly control over trade and business, which squeezed the room for local entrepreneurs to flourish. Monopoly control was established over such valuable products as salt, betel nut, indigo, and so on. The Company was privileged with a unique opportunity—it was exempted from Mughal customs dues that was applicable to local business enterprises. Khan (1989) argues that this single trade policy simply destroyed the locally grown textile industry of the Bengal. Moreover, industrial development in the Indian subcontinent under the British rule saw an imbalance between regions. Most large-scale industries were concentrated on Indian provinces because of, inter alia, relatively better infrastructure. For example, jute and textile were the main industries in the Indian subcontinent at that time. However, when Pakistan

  PATRON-CLIENT POLITICS AND THE RISE OF THE BUSINESS CLASS 

89

was separated from India in 1947, there was no industry worth its name in East and West Pakistan. Among 112 jute mills in India, hardly any of them fell in Pakistan. East Pakistan (Bangladesh), which produced a major share of jute, was reduced to the hinterland of industries in Calcutta during the British rule (Aremu and Miah 2008). Only 12 percent of the industrial establishments of undivided Bengal came to the share of East Pakistan, despite the fact that it was the main supplier of raw materials. Sobhan (1980: 3) notes, “[A]t partition, there was not a single large scale industrial enterprise in East Bengal controlled by a Bengali Muslim nor were they present in the jute trade, tea or inland water transport.” The first spurt of industrial development in Pakistan was facilitated by the market response fueled by industrial imbalance between India and Pakistan, when the latter refused to maintain exchange relationship with the former (Khan 1989). In addition, the Korean War in the 1950s created a surge in the price of basic raw materials, including raw jute and cottons, which Pakistan was famous for. This was followed by the foreign exchange crisis in Pakistan, which triggered the import control. At the same time, emphasis was put on import substitution industries. Domestic trading became extremely profitable as a result. These events left Pakistani trading houses, mostly controlled by Gujrati Muslim merchants, in West Pakistan with a small amount of trading profit. Papanek (1967) reported that some merchants materialized average annualized profit between 50 to 100 percent in the early to mid-1950s. At the same time, some key institutional developments took place to encourage traders to become industrialists. For instance, subsidies were allowed by keeping differential exchange rates. An overvalued exchange rate was allowed for importers of industrial machineries, whereas an undervalued rate was recommended for the export of agriculture raw materials. This process transferred a portion of agricultural income to the industry as subsidy. While trading profit functioned as an important source of finance for the merchant turned industrialists, state supports in various forms, such as establishing state-owned devolvement financial institutions and subsidized finance to industries, played a key role in industrial development in Pakistan not only in the West but in the East as well. However, the development of an industrial class in East Pakistan was very limited due to various reasons. First, the institutional development in East Pakistan was not at par with the West. Second, unlike the West, East Pakistan lacked the indigenous traditional elite who could effectively assume the responsibility of state administration. This inability of the East

90 

M. D. MIAH AND Y. SUZUKI

wing paved the way for West Pakistani military and bureaucrats to establish a firm control on the state apparatus located in the East, which ­aggravated the setup of its industrial development. As a consequence, while private sector played a vital role for economic development in the postcolonial West Pakistan, it remained backward in East Pakistan (Khan 1989). Khan (1989) further argues that the military coup in Pakistan in 1958 changed the political settlement, which sowed the seeds of industrial development in both East and West Pakistan. The basic tenet of the new political settlement was the institutional change that allowed the state to assign the rights conducive to industrial growth without compromising the minimum viability threshold of political institutions (Khan 1989). However, the by-product of this new arrangement resulted in the formation of new clientelist coalition in which only a narrowly defined capitalist class benefited most from the state policies. The favored group was basically the descenders of the traders who had initiated the process of industrialization. Amjad (1982) reports that from 1958 to 1970, the Pakistan Industrial Credit and Investment Corporation disbursed 44.7 percent of the loans to 113 trading houses, mostly located in the West. The discrimination between East and West wings skyrocketed by the mid-1960s, which kept the latter unexpectedly underdeveloped. Statistics shows that prior to the liberation war, the industrial base was quite small, comprising of 3130 registered factories, which contributed only 7.8 percent to GDP, of which only 3.7 percent was contributed by large-scale enterprises (Kochanek 1996). Despite the fact that the majority of these factories were owned by Bangladeshi entrepreneurs, they were relatively small with a small base of assets. Kochanek (1996) reports that Bengali Muslim capitalists owned 2253 factories, which were 74 percent of the total. But they represented only 18 percent of industrial assets. In West Pakistan, there were some 42 wealthy families who controlled most of the businesses in the 1960s. Among these groups, a few families— including Adamjee, Arag, Bawani Dada, Dawood, Gandhara, Habib, and Ispahani—had their investment in the East wing of Pakistan and they opted to remain so even after its independence. The above analysis and evidence prove that before the independence of Bangladesh, there were only a few large businesses worth mentioning, specially in East Pakistan. Lack of entrepreneurial spirit and biased policy created only a handful of Bengali business houses that could be considered relatively large. As a consequence, not only was the contribution by the

  PATRON-CLIENT POLITICS AND THE RISE OF THE BUSINESS CLASS 

91

Table 5.1  Leading Bangladeshi business houses in 1969–70 Rank Business group 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

A. K. Khan Gul Baksh Bhuiya Zahurul Islam Md. Fakir Chand Maqbulur Rahman and Zahurul Qayyum Al-Haj Muslimuddin Al-Haj Samsuzzoha Khan Bahadur Mujibur Rahman Afil Sattar Ashraf Bhandari Safdar Ali Ibrahim Mia Serajul Islam Chowdhury’ Mohammad Abdus Samad (Delta group) Total

No. of companies Estimated assets (in million Rs) 12 5 14 10 9

75 65 60 60 50

6 5 4 7 5 4 6 7 7 4 5

50 50 45 40 30 30 30 30 30 25 25

110

695

Adapted from Kochanek (1993, p. 113)

large-scale enterprises to GDP small, but these business houses were highly concentrated in a few elite families. Table  5.1 lists 16 Bengali-Muslim business houses in 1969–70 with assets of PKR 25 million or more. These business houses were family-based enterprises and dominated the lion’s share of industrial enterprises in Bangladesh before its independence.

5.3   The Rise of the Business Class in Independent Bangladesh Following independence, West Pakistan–based private enterprises located in Bangladesh were taken over by the state. This led to the rise of the state’s share of industry to 81 percent after independence. Moreover, the government pursued a socialist model of industrial development, and hence, nationalized Bengali-owned enterprises as well. Altogether, the government nationalized about 350 medium-size and large companies, including industrial and trading firms, banks, and financial institutions during the first two years of independence. These state-owned enterprises

92 

M. D. MIAH AND Y. SUZUKI

(SOEs) represented over 92 percent of the total fixed assets of the ­industrial sector (Uddin 2005). Apart from the nationalization move, the possibility of growth of private entrepreneurs was further squeezed by imposing a ceiling on private investment at an amount of BDT 2.5 million. The ill effect brought by the socialist model soon reflected in the economic performance of the country. For instance, the productivity of manufacturing sector declined to half of the 1970 level, along with the decline of wage in manufacturing to 60 percent compared to 1969–70 level (Khan 1989). Khan further argues that government intended to provision few policies (hiring, firing, rotation, revising pay-scale of employees, etc.) to counteract declining economic performance. However, the patron-client coalition between the government and other social groups, including businessmen and bureaucrats, was so intense that the government was practically unable to absorb the pressure from those who would lose from the proposed change. The policy could not be pursued at last. Pressure on government also stemmed from those industrialists who were excluded by the state nationalization policy and the deprived industrialists marred by the investment ceiling. This pressure, coupled with the declining economic and social indicators, facilitated the preparation of a new industrial policy in 1974. The new policy amended some of the existing provisions while incorporating some new measures. For instance, the ceiling on private investment increased to BDT 30 million and partnership with foreign investors, which was previously denied, was allowed. Currency devaluation was instituted, and government tax holiday was initiated. These measures cemented the existing clientelist coalitions of resource distribution instead of loosening them. Party leaders manipulated permit distribution in exchange for personal gains (Maniruzzaman 1980; Sarker 2008). Furthermore, responsibility for the distribution of products manufactured by poorly performing state-owned firms was given to well-­ connected businessmen, rather than professional traders (Guhathakurta 2002; Huque 1988). This resulted in the rise of business and elites in the early years of Bangladesh (Mollah 2011; Huque 1988) despite this class still remaining small and highly concentrated. While the era of Sheikh Mujib was characterized by the state or public sector–led economic activities, President General Ziaur Rahman, however, emphasized private sector–led growth. In this pursuant, he completely lifted the ceiling on private investment imposed by the previous government. Consequently, a temporary burst of private investment followed, with the gradual emergence of a new class of entrepreneurs. Private

  PATRON-CLIENT POLITICS AND THE RISE OF THE BUSINESS CLASS 

93

investment in industry increased from BDT 87.4 million in 1973–74 to BDT 209.14 million in 1977–78 (Islam, S. 1987). Moreover, General Zia initiated a denationalization policy by privatizing public enterprises and returning enterprises that were previously nationalized to their original owners. By 1979, 40 percent of the nationalized industries had been returned to the private entrepreneurs. Of the total 785 nationalized industrial units, 159 were returned to the industrial owners while 200 were sold to private bidders, and the remaining were retained and controlled by the Ministry of Industries (Islam, S. 1987). Apart from denationalization policies, General Zia adopted other measures to help industrialization, including export liberalization, import substitution, revising foreign exchange policies, and so on. Government relaxed the restrictions on foreign investment by raising the ceiling of foreign equity participation. However, it did not work well because Bangladesh lacked a vast reserve of natural resources to be used as raw materials for industrial products. This meant that private sector–led industrial policy had to focus on raising the indigenous entrepreneurs. As part of this plan, the Dhaka Stock Exchange (DSE), which remained defunct since the country’s independence, was revived in 1976. Although the government was very enthusiastic in raising the base of private entrepreneurs, the emergence of new industrialists was not observed to a great extent. Responding to government’s various incentives, about 3500 industrial units registered with the Investment Board during the period 1975–1980 (Islam, S. 1987). However, most of them were small-scale investment involved in such sectors as dairy and farming, deep-sea fishing, agriculture machineries, pharmaceuticals, and so on. This was, indeed, the opportunity for a few existing family firms and some new family firms (City Group, Concord, Jamuna, Meghna, Sunman, Flora, Nasir) to secure privileges due to policy reforms and distribution of government rents, facilitated by a state-business nexus (Kochanek 1993). General Ershad, the successor of President Zia, continued the basic industrial policies like his predecessor, which included the denationalization of industries, economic liberalization, private sector–led economic growth, import substitution, and so on. Unlike the previous regime, which focused mostly on privatizing small and loss-making enterprises, General Ershad formulated a new industrial policy in 1982 which prioritized divestiture of large-scale enterprises. Khan (1989) reports that about 110 large enterprises were privatized in just little more than a year. However, many large-scale enterprises were still held by the state to

94 

M. D. MIAH AND Y. SUZUKI

accommodate different clientele groups through managing their work opportunities in those enterprises (for a detailed account of ghost and redundant workers in the SOEs, see Khan 1989). Census of Manufacturing Industries (CMI) in 1988/89 reports that there were 210 manufacturing enterprises in the public sector in the reference year. They were very large enterprises with average employment per establishment of 1386 persons whereas the average of all CMI-covered enterprises was 49. The share of the public sector in the value added by large industry is estimated at about 59 percent. Moreover, most of the enterprises divested were purchased by single owners who preferred to keep the ownership of the business within their families (Uddin and Hopper 2003). The new industrial policy further included tax holidays, interest rate subsidies, preferential exchange rate, and other fiscal incentives. In addition to extending the liberalization process initiated earlier, the government identified 50 free sectors for which investors were allowed to purchase necessary foreign exchange from the market to import industrial machinery. Khan (1989) shows that the import of capital goods increased almost double—from 44 percent in 1981 to 85 percent in 1984. In 1986, the government further removed a host of important restrictions on private investment, leading to the rise of industrial assets owned by the private sector to 45 percent, compared to only 15 percent in 1972. However, due to political chaos erupted during the last few years of President Ershad’s tenure, the trend of investment slowed down. Specially, foreign investment could not materialize as expected despite providing various incentives. For instance, export processing zones (EPZs) was one among various incentives offered by the government. Khan (1989) shows that only seven foreign firms were operating in Chittagong EPZ until late 1985, which means that the process of industrialization of the country was carried forward by the indigenous family entrepreneurs. By the late 1980s, 34 families had successfully accumulated a deposit of BDT 25.38 billion and earning assets of BDT 17.59 billion, giving rise to a new bourgeoisie in Bangladesh (Nuruzzaman 2004). Besides, President Ershad allowed wealthy and well-connected family firms access to generous lending from banks at very relaxable conditions (Abdullah 1991). By June 1990, total overdue to depository financial institutions (DFIs) stood at about BDT 11 billion and 96 percent of private sector borrowers were classified as defaulters (Abdullah 1991).

  PATRON-CLIENT POLITICS AND THE RISE OF THE BUSINESS CLASS 

95

Table 5.2  Top 14 industrial houses of Bangladesh in 1988 Name of group Zahurul Islam Ispahani Beximco Anwar A K Khan Muhammad Bhai (Panther) W. Rahman jute Apex Pacific Square Elite ERBA (Alpha Tobacco) Karnaphuli Kumudini

No. of companies

Year established

Annual turnover Founder chairman (in million BDT)

1963 Pre-47 1966 1971 1945

628.6 NA 524.3 NA 500.00

9

1956

705.5

10 4 5 5

1985 1972 1974 1958

2510.0a 650.0 542.5 503.1

5 4

1954 1959

473.9 385.9

14

1964

350.0

3

1933

340.0

24 23 17 18 15

Zahurul Haque M. M. Ispahani A. S. F. Rahman M. Anwar Hossain A. M. Zahiruddin Khan Mahammad Bhai Latifur Rahman Syed Manzur Elahi M. Morshed Khan Samson H. Chowdhury Ramzual Seraj Agha Ahmad Yusuf Hedayet H. Chowdhury Mrs. Joya Pati

Adapted from Kochanek (1996) a The W. Rahman Jute Group is a large trading house, but only 30 percent of their turnover is a result of industrial activity

Among the top business conglomerates of 1969–70 (Table 5.1), three of the top Bangladeshi houses—A.  K. Khan group, the Zahurul Islam group, and W. Rahman Jute group—managed to secure places among the top 14 business houses in the 1980s (Table 5.2). The Zahurul Islam group is still one of the dominant business groups in Bangladesh. The Ispahani group is a former Pakistan-based house still dominating in Bangladesh. Although it had invested in both wings of Pakistan, the vast majority of Ispahani assets were located in the East. After the liberation war, the group remained in Bangladesh. Despite being a giant conglomerate, it is still not listed in the stock market. Thus, the control of the group is retained by the founding family. Similar story applies to A. K. Khan and Co., which was established in 1945 by the founder, Abul Kasehm Khan. He served as Federal Minister for Industries, Works, Irrigation, Power and Natural Resources in General

96 

M. D. MIAH AND Y. SUZUKI

Ayub’s cabinet of Pakistan. It was a large conglomerate even in the Pakistan regime. Like Ispahani, the A. K. Khan group was nationalized in 1972, which was denationalized in 1982. Subsequently, the group divided into two independent groups—Pacific Industries, owned and led by Morshed Khan, the nephew of A. K. Khan, and Sidko Group, founded by M. R. Siddiqui, son-in-law of A. K. Khan. Morshed Khan is a prominent politician of Bangladesh who was in charge of various portfolios, including the foreign ministry during the BNP tenure in 2001–2006. Similarly, the Islam group has appeared as the most progressing and fastest growing companies in Bangladesh. Zahirul Islam, the founder of the Islam group, expanded the business to various fields. During his lifetime, Zahirul Islam kept affiliate firms under the control of the Islam family. Being a large conglomerate, its only affiliate, Eastern Housing Limited, is a public limited company. Despite this, the Islam group retains 48 percent of its total stake. Even though most of the top 14 business conglomerates (Table 5.2) have their roots in the time before Bangladesh achieved independence, three groups of companies—Anwar, Apex, and Pacific—managed to emerge in independent Bangladesh. Four groups, on the other hand, are the products of the 1950s. Currently, Beximco tops the list of business conglomerates in Bangladesh. Some of its affiliates are listed on the stock market and they comprise a larger percentage of total market capitalization in Bangladesh. Salman F. Rahman is all in all of the group, who is currently the political adviser of the prime minister, Sheikh Hasina. Since its ascendency to full democracy in 1991, the industrial policy of the country has been revised on numerous occasions. Specially, international development organizations, including the World Bank (WB), IMF, and other donor agencies, have prescribed several economic reforms. Thus, the revised industrial policy had to reflect most of these prescriptions. During the last phase of General Ershad, private sector investment declined significantly. Thus, the WB emphasized reverting the declining trend of domestic investment along with the urge to enhance public investment by accelerating the pace of policy reforms. Other emergencies which the WB did not emphasize but unleashed by the economic circumstances of the country were the needs for private sector development in manufacturing. This, however, depended heavily on some important preconditions, including the recovery of non-performing assets of banks, which limited the

  PATRON-CLIENT POLITICS AND THE RISE OF THE BUSINESS CLASS 

97

investors’ access to credit and availability of industrial raw material, which was restrained by the restrictions of import. As usual, privatization was the primary target to increase the private investment. However, the question remains whether privatization initiated in the past was accompanied by a better performance. Sobhan (1991) argues that before 1991, there was no study conducted by the public and private initiatives to assess if privatization really improved the performance of divested firms. In 1991, the first such study was conducted by the Board of Investment (BOI) for a sample of 290 divested firms. The report found that 53 percent of sample firms were either closed or ceased their operation and the remaining did not do well compared to the public enterprises (Sobhan 1991). Sobhan (1991: 206) points out the logic of privatization: “[T]he government of Bangladesh was driven by political rather than pragmatic reasons to privatise industry in Bangladesh.” Despite this, the privatization tempo remained unchanged. From 1986 to 1992, about 500 enterprises were divested either by returning them to their original owners or by outright selling (Momen 2007). In order to accelerate this policy, a privatization board was established in 1993. Since then, a total of 74 SOEs were privatized, of which 54 were privatized through outright sale and the remaining 20 through offloading shares. Besides state’s policy of denationalization to encourage new entrepreneurs to assume ownership of such SOEs, government also provided various incentives, such as easy access to bank loans, to encourage entrepreneurs for starting new businesses. This gave rise to the wealth concentration of some wealthy families because most denationalized enterprises were acquired by the old families or new emerging familybased business. Uddin (2005) thus argues that privatization in Bangladesh may have redistributed power and wealth to some of the new private owners, leading to family capitalism. Validity of this claim can be realized from Table  5.3, which shows that almost all companies that were divested from 1991 to 1996 were run by some new families and mostly by families that were already established in business. Established family businesses having a good connection with state’s authority captured most of those enterprises, even paying less than the market value of those enterprises. This postulates that state’s divestiture policy has bred a new family-­ based business elite rather than broad-based overall entrepreneurial development. As a result, even though the size of these new elite was estimated

98 

M. D. MIAH AND Y. SUZUKI

Table 5.3  Ownership of 12 privatized SOEs Enterprises denationalized

1. Chittagong Cement Clinker Grinding Company (CCCG) 2. The Eagle Box & Carton Manufacturing Co. Ltd. 3. Dhaka Vegetable Oil Industry Ltd. 4. Barisal Textile Mills 5. Kishoreganj Textile Mills 6. The Kohinoor Spinning Mills 7. The Style Fabrics Embroidery Limited 8. Madaripur Textiles Ltd. 9. Bangladesh Cycle Industries Ltd. 10. Quantam Pharma 11. Sinha Textile 12. Hamidia Metals

Divested year

Estimated market price (in million BDT)

Sale price (in New million ownership BDT)

1992

NA

335.0

Family

1994

NA

20

Family

1993

NA

139.4

Family

1995 1994 1995

271.1 326.9 256.0

50.0 95.3 180.5

Family Family Family

1995

19.4

12.5

Family

1995 1994

213.1 NA

80.7 22.8

Family Family

1994 1994 1994

NA 85.9 NA

1.1 117.6 4.6

Family Family Family

Source: Constructed from Uddin and Hopper (2003)

to be at about 100–200 business groups by the late 1980s, only 15–25 family conglomerates control the lion’s share of industrial assets even today. Rahman, M. (2007: 5) characterizes: Elite groups in Bangladesh constitute a fraction of the total population (less than 2% of a total population) who are again concentrated in Dhaka. Despite their small number, the elites with their ownership and control over vast economic resources command a disproportionate influence on the rest of the society including institutional function. They control almost all forms of internal resources as well as the inflow of external resources.

These business conglomerates are different in nature in the sense that most of them are not listed in the bourse lest the family loses control over them. Moreover, in the case of listed companies, controlling stakes are held by family members who are generally the sponsor directors. Khan et  al. (2011) report that majority shares of the listed companies in the Dhaka Stock Exchange are owned by the sponsors.

  PATRON-CLIENT POLITICS AND THE RISE OF THE BUSINESS CLASS 

99

5.4   Clientelism Cemented in the Democratic Era Before restoration of full democracy in 1991, industrial policies basically relied on privatizing state-owned enterprises, providing subsidies to industries through various means, including differential exchange rates, emphasizing import substitution industries, facilitating comparatively easy access to finance from state-owned commercial banks, and so on. Given the agrarian base of the economy and an industrial base characterized by few large family conglomerates, the patron-client coalition between business and government did not yield severe negative impact on the economy. However, resource distribution was inefficient because subsidies helped inefficient firms survive at the expense of society. Moreover, privatization was not economically viable under the new form of ownership; but rather, it was utilized by successive governments as a means of political side payment which aimed to pacify political voice raised against incumbent regimes. These traditional tools of resource distribution among favored groups have eroded over the years. Gradual denationalization has relinquished the available stock of SOEs to be privatized. More importantly, due to the resistance from different interest groups, including the collective bargaining agents (CBA) and other such employee associations, a few SOEs which still remain under the control of the state cannot be effectively privatized. On the other hand, the nascent pace of globalization has forced the economy to liberalize by slashing tariffs and non-tariffs barriers. These market forces, along with strong voice from World Bank, IMF, and other regional economic blocks against various duties and subsidies, have turned traditional means of protecting sick and inefficient industries irrelevant. Amidst this trend, rent seeking by the patron has taken different shapes. Businessmen now find politics a profitable means of business or a ­convincing way of surplus appropriation. As a result, the participation of businessmen in politics has increased tremendously over the past few decades. For instance, only 4 percent of the legislative members elected in 1954 were businessmen and industrialists by profession. In 1970, the AL won 160 of 162 seats allocated for East Pakistan. The elected members constituted 19 percent businessmen, 47 percent lawyers. Although the proportion of the businessmen/industrialists declined to 13 percent in 1973 (Table 5.4), the first parliamentary election of independent Bangladesh, the composition changed tremendously in the subsequent period. For example, the proportion of businessmen and industrialists increased to 34 percent in the second

100 

M. D. MIAH AND Y. SUZUKI

Table 5.4  Background of MPs Profession

1970

First

Fifth

Seventh

Eighth

Ninth

27 3 30 17 5 19

24 NA 27 15 13 21

53 8 19 14 2 4

48 8 17 9 4 14

57 8 11 11 7 6

56 10 15 7 5 7

Businessman/industrialist Civil/military bureaucrat Lawyer Professional Politics Others Source: Jahan and Amundsen (2012)

parliamentary election held during the martial law regime led by President Zia in 1979. This trend continued during the second martial law regime led by General Ershad. Businessmen continued enjoying privileges in the third and fourth parliamentary elections held in 1986 and 1988, respectively, during the tenure of General Ershad. Compared to other elections, the fifth parliamentary election, which was held in 1991, was free and fair. Of the 330 elected members, businessmen constituted 59.4 percent, lawyers 18.8 percent, and professionals 15.5 percent. The sixth parliamentary election held in February 1996 was a sort of mockery because major parties except the incumbent boycotted the election. This was followed by the seventh parliamentary election in June 1996. Data for 318 members were available. Businessmen, lawyers, and professionals constituted 47.8, 15.8, and 8.5 percent, respectively. The percentage of businessmen and industrialists turned MPs went up to 52.10 in the eighth parliamentary election held in 2001. Similar trend was noticed in the ninth parliament election held in January 2009. A whopping 63 percent of the MPs were businessmen (Table 5.4). The presence of businessmen in politics has taken the patron-client politics to a new level. The president of the country said that the country’s politics has gone to the pockets of businessmen.1 Similarly, former chief justice S. K. Sinha lamented the abnormal concentration of businessmen in our legislative politics.2 The ill effect of clientelism has reflected in many economic activities of the country. The banking sector provides an important insight into the innate patron-client politics. State-owned commercial banks (SCBs) dominated the commercial lending market until the 1990s. Although private commercial banks have been gradually taking the place of SCBs, the latter still has a significant presence in the market. Irrespective of ownership,

  PATRON-CLIENT POLITICS AND THE RISE OF THE BUSINESS CLASS 

101

problem assets of these banks frequently trouble the financial system. It was observed that the rate of non-performing loans (NPLs) declined in 2000s. However, the trend reversed in the past few years. NPL accounted for 8.93 per cent of total loans in 2013, which rose to 10.53 per cent in the first quarter of 2017. According to the statistics of Bangladesh Bank, default loans amounted to BDT 622 billion against the banking sector’s total capital of BDT 837.58 billion as of December 2016, which means that default loan accounts for 74 percent of the capital. The amount of default loans increased further to BDT 734 billion as of March 2017, which is about 80 percent of the total capital. SCBs are the worst sufferer of the NPL problem. As of June 2017, default loan of SCBs amounted to approximately BDT 345.8 billion, which is about 27 percent of the total loan disbursed (Bangladesh Bank 2017).3 A careful observation of the default list (Table 5.5) would shed light not only on the severity of the bad loan problem and the associated banking crisis but also on how the patron-client relation works within the spheres of interest politics where the patron provides the client state resources in exchange for the client’s support. Government exercises absolute control over state-owned banks, which gives it a wide discretion to influence loan decisions. Like other developing countries, the public sector itself is the major culprit for bad loan problems in Bangladesh. Three corporations— petroleum, jute, and textile—constitute the lion’s share of public sector classified loans. However, it might not pose a serious threat because government has to fund SOEs through budgetary allocation. Thus, fund transfer to these key corporations through bank transfer instead of direct budget allocation is a general phenomenon of the economy so long as those corporations function with efficiency (Suzuki et al. 2008). Contrary to expectations, public corporations in Bangladesh are examples of inefficiency, nepotism, corruption, and, ultimately, the loss machines (Khan 1989). Loan default is undesirable in any circumstances and more so when a substantial amount of an NPL is concentrated in a few large family-based conglomerates. An analysis of the top private sector loan defaulters (as of June 2006) reveals that they are the big family-based conglomerates which claim a strong link with political parties. For example, Bangladesh Export Import Company (Beximco), the largest family-based business conglomerate of Bangladesh, is one of the largest loan defaulters. Shinepukur Holdings Ltd., an affiliate of Beximco, owed BDT1380 million to the banking system, of which BDT1010 million was default loans, whereas Beximco Engineering Ltd., another subsidiary of the group, has BDT520

102 

M. D. MIAH AND Y. SUZUKI

Table 5.5  Top 20 loan defaulters as of June 30, 2006 (BDT in million) Public sector Ranka Name of the defaulters 1

Bangladesh Petroleum Corporations 2 Bangladesh Jute Mills Corporation 3 Bangladesh Textile Mills Corporation 4 Chittagong Jute Mills 5 Khulna Newspaper Mills 6 Bangladesh Agriculture Development Corporations 7 Bangladesh Autorickshaw Chalak Samity Private sector Rank Name of the defaulters 8 9 10 11 12 13 14 15 16 17 18 19 20

Beximco Group Riverside Leather and Footwear Ltd.b Shamsul Al-Amin Cotton Mills Ltd. Phoenix Leather Complex Lina Textile Desh Beverage Company Ltd. Dhaka Jute Mills Ltd. Desma Shoe Industries Mainamati Textile Mills Protein Foods Ltd. Sreepur Textile Mills Ltd. Lexco Ltd. Dhaka Vegetable Oil Industry

Total loan 64,890

Default amount 41,300

Default (% of total loan) 64

6990

2340

33

1960

1960

100

……. 770 750

860 720 750

….. 94 100

770

770

100

Total loan 1900 880

Default amount 1530 800

Percentage 81 91

770

560 590 510

800

690 680 620 590 560 510 500 500 500 500

100 86 98

63

Source: Constructed based on Bangladesh Bank information reported in the daily newspapers a Rank might vary within the group, taking into account the provision of rescheduling, litigations, etc. However, the deviation is very minimal b

That amount is due only to Sonali Bank (largest of the four state-owned commercial banks)

million outstanding loan, the whole amount being non-performing. Salman F. Rahman, the chairman of the Beximco group is one of the influential figures in Bangladesh politics. He has been accused of a number of financial crimes since the independence of Bangladesh and has earned a bad reputation, especially dealing with bank loans.4

  PATRON-CLIENT POLITICS AND THE RISE OF THE BUSINESS CLASS 

103

It is reported that Salman F. Rahman misappropriated huge amounts of money by giving false information about his father’s industry, New Dhaka Industry, when the industries were nationalized after the independence of Bangladesh.5 The money earned in this way was utilized to transform the company into what it is known today as the Beximco group. He appropriated a big chunk of money especially during the governments of President Zia and General Ershad. When the BNP assumed power in 1991, Salman F. Rahman established a tightly knit relationship with Salahuddin Quader Chowdhury, BNP Chairperson’s Parliamentary Affairs Adviser. A case was filed against Salman F.  Rahman for misappropriating BDT3000 million from the stock market by providing false information, leading to a historic stock market crash in 1996.6 Amidst all these allegations, the AL nominated him to contest for a constituency in the 2001 parliamentary election. On the eve of another parliamentary election, which was scheduled on January 22, 2007, the election commission declared loan defaulters ineligible to participate in the general election. But he managed to seek a court stay order on his loan default cases and contested. Salman F. Rahman is now one of the influential advisers of the incumbent prime minister. This is not a standalone case that shows resource appropriation through a patron-client network. Maolana Abdul Mannan, the owner of Riverside Footwear Ltd. (reported in Table 5.5), was a minister in President Zia’s cabinet and also a cabinet minister in the General Ershad regime. He was a pro-Jamaat-e-Islami (JI) supporter before BNP made a coalition with JI in 2001. After the coalition government won the 2001 general election, Riverside Footwear Ltd. showed no urgency to repay the bank loans. Similarly, Shamsul Al-Amin Cotton Mills Ltd. was one of the top 20 loan defaulters, owned by former AL lawmaker, Shamsul Al Amin. Another top 20 loan defaulter was Dhaka Vegetables Oil Industries Ltd., of which Mohammad Ali was the chairman and managing director. He was a senior vice president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI). Deshma Shoe Industry, owned by him, also had an outstanding loan of BDT560 million, which was totally non-­performing. A huge outcry erupted in the political arena when Sonali Bank waived BDT1290 million interest on loans due to Dhaka Vegetable Oil Industries. It is reported that the loans were taken showing edible oil stock at Dhaka Vegetable Oil Industries plant, but Sonali Bank officials later found that the containers were full of water instead of oil.7 He also borrowed BDT520 million from Oriental Bank and BDT330 million from the IFIC bank. Islam et al. (1999) draws a sample of 1000 top loan defaulters from the list of 2117 and shows that the board of directors of 54.4 percent business

104 

M. D. MIAH AND Y. SUZUKI

units includes three to five family members who are also the key persons running the business. Relatives and longtime friends also constitute the majority of the board of directors. This proves that private business firms which are the largest loan defaulters are basically family-based businesses. The study further reports that almost 65 percent of key persons of the surveyed firms are affiliated with big three political parties in Bangladesh (35.2 percent with BNP, 19.2 percent with AL, and 10.4 percent with JP). The report further confirms that most loan defaulters have changed their political affiliations (party) commensurably with the change of political regimes. Only 28 percent of the respondents reported that they did not change their political affiliation. A total of 125 respondents mentioned that they changed political affiliation, of which 54.4 percent changed their political affiliation at least once, 11.2 percent twice, and 6.4 percent thrice. This means that political power is traded for public services and resources. In other words, access to state resources is translated into a political tool to enhance the power of the key persons of these loan-defaulting units. The report also highlights that the patrons seek direct intervention from clients in their process of accessing state resources. Of the 125 key persons surveyed who affirmed the change of political affiliation, 78 percent confessed that they directly maintained connections with political personalities for seeking bank loans. Only 28 firms or 22.4 percent of key persons reported that they did not maintain any relation with political parties throughout the process. Most of the respondents mentioned that ministers played a key role in approaching banks for loans (46.4 percent cases). Members of parliament (35.1 percent cases) and the ruling parties’ central leaders (13.4 percent cases) were also involved in sanctioning loans. Like family conglomerates, most private banks in Bangladesh are owned by families. Members of the family occupy majority seats in the board of these banks and influence banks’ loan decisions. It was reported that founding members of private banks borrowed more than six times their capital in 2016 (Bonik Barta 2017).8 The report further showed that in 2016, private commercial banks disbursed loans amounting to BDT4949 billion, of which directors borrowed about BDT700 million (more than 14 percent). In contrast, the founders of 40 private commercial banks provided BDT160 billion as capital against the total deposit of BDT5827.18 billion. This means that owners provided capital accounts for less than 3 percent. Taking into consideration the high default rate in Bangladesh, commercial banks face tremendous shortfall of capital. It is

  PATRON-CLIENT POLITICS AND THE RISE OF THE BUSINESS CLASS 

105

reported that nine banks faced a capital shortfall of BDT177 billion as of September 2017. Besides SCBs and specialized banks, the list includes one private bank, the Farmers Bank Ltd. Majority stake of the banks is owned by the ruling AL leaders, including the immediate former state minister. Government cannot simply allow a bank, public or private, to go bankrupt because the overall impact of bankruptcy would be disastrous to the economy. Thus, government frequently injects money to recapitalize trouble banks. Since 2009, more than BDT145 billion was injected to the coffers of SCBs and other financial institutions (Hashim 2018). Again, the government is preparing for another round of capital injection, amounting to BDT20 billion, to increase the capital base of these troubled banks. It is to be reminded that in June 2006, the government dissolved the board of a private commercial bank, the Oriental Bank, after detecting massive corruption. To safeguard the interest of the depositors, the central bank took over its full control and appointed an executive director as the bank’s administrator. Taking resource scarcity into consideration in underdeveloped countries such as Bangladesh, these fiscal resources should be allocated efficiently so that society gains most from this allocation. Such hard-earned government revenue is simply injected to increase banks’ capital when the lion’s share of their loans turns into bad or classified. It is more shocking because the default is voluntary and the defaulters cannot be brought to justice due to their political identity.

5.5   Conclusion Bangladesh, as an independent state, is still young. Among the large business houses today, some have grown in independent Bangladesh and others can trace their roots in the colonial period. Two turbulent political phases (division of the Indian subcontinent in 1947 and the liberation war of Bangladesh in 1971) seriously hindered the natural growth trajectory of those indigenous business houses, which started their journey before these events took place. During the British period (1757–1947), industrial development was driven by the necessities of the colonial ruler, or more specially, the commercial needs of East Indian Company. Since the colonial ruler mostly extracted and exported raw materials from the Indian subcontinent to the parent country, no significant industrial development worth a mention occurred during the 190 years of colonial rule. Of the few industries which were developed as supplementary to the extraction and export purpose, none was located in the Bengal.

106 

M. D. MIAH AND Y. SUZUKI

Although the Pakistan period (1947–1971) was politically different from the colonial ruler, industries in Bengal did not grow with a lot of enthusiasm due to apparent administrative and policy discriminations between two wings of Pakistan, East and West. Still, a large consumer base, coupled with the availability of agriculture-based raw materials, facilitated the development of some industries. Some of them which opted for East Pakistan (Bangladesh) grew well in postindependent Bangladesh. However, they received the first blow when government decided to nationalize all industries following independence. Subsequently, denationalization was initiated through privatizing nationalized industries either by returning to their previous owners or by selling them to new acquirers. Privatization was followed by various patronage incentives provided to these industries, which include subsidies, differential exchange rates, protection for import-substitute industries, and so on. Thus, the small and concentrated business base which exists today in Bangladesh has thrived partly due to founders’ entrepreneurial capacity and mainly due to various supports provided by the state under the patron-client network.

Notes 1. Bangladesh’s politics now in pockets of businessmen, The Daily Star, October 13, 2015. 2. Judiciary working independently, The Daily Star, October 04, 2015. 3. Bangladesh Bank, Annual Report, 2016–2017. 4. “Litany of allegations”, The Daily Star, February 5, 2007. 5. Ibid. 6. Ibid. 7. Sonali’s Tk 129cr interest waiver surprises many, The Daily Star, April 25, 2007. 8. Founding directors borrowed six times of their capital, Banik Barta, May 10, 2017.

References Abdullah, A. (1991). Modernisation at Bay: Structure and Change in Bangladesh. Dhaka: University Press Ltd. Amjad, R. (1982). Private Industrial Investment in Pakistan: 1960–1970. Cambridge University Press.

  PATRON-CLIENT POLITICS AND THE RISE OF THE BUSINESS CLASS 

107

Aremu, F., & Miah, M.  D. (2008). Institutional Constraints and Economic Backwardness: Evidence from Nigeria and Bangladesh. Nigerian Journal of International Affairs, 32(2), 19–48. Guhathakurta, M. (2002). The Nature of the Bangladeshi State. In Ain O Salish Kendra (Ed.), Human Rights in Bangladesh (pp.  19–31). Dhaka: University Press Limited. Hashim, S. (2018, March 13). Why the Endless Bailouts of State-Owned Banks? The Daily Star. Huque, A. S. (1988). Politics and administration in Bangladesh: problems of participation. Dhaka: University Press Ltd. Islam, M., Shahid, A., Chaudhury, A.  J., and Siddique, M. (1999). Bank Loan Default Problem in Bangladesh: A dialogue Between Borrowers and Lenders. Bank Parikrama, XXIV (2): 22–31. Islam, S. (1987). Bangladesh in 1986: Entering a New Phase. Asian Survey, 27(2), 163–172. Jahan, R., & Amundsen, I. (2012). The Parliament of Bangladesh. Representation and Accountability. Dhaka: Center for Policy Dialogue. CPD-CMI Working Paper, 2. Khan, M. H. (1989). Clientelism, corruption and capitalist development: an analysis of state intervention with special reference to Bangladesh (Thesis). University of Cambridge. https://doi.org/10.17863/CAM.16517 Khan, A. R., Hossain, D. M., & Siddiqui, J. (2011). Corporate Ownership Concentration and Audit Fees: The Case of an Emerging Economy. Advances in Accounting, 27(1), 125–131. Kochanek, S. A. (1993). Patron-Client Politics and Business in Bangladesh. New Delhi: Sage Publications. Kochanek, S. A. (1996). The Rise of Interest Politics in Bangladesh. Asian Survey, 36(7), 704–722. Maniruzzaman, T. (1980). The Bangladesh Revolution and Its Aftermath. Dhaka: University Press Limited. Mollah, M.  A. H. (2011). Growth and Development of Civil Service and Bureaucracy in Bangladesh: An Overview. South Asian Survey, 18(1), 137–156. Momen, N. (2007). Implementation of Privatization Policy: Lessons from Bangladesh. The Innovation Journal: The Public Sector Innovation Journal, 12, 14. Nuruzzaman, M. (2004). Neoliberal economic reforms, the rich and the poor in Bangladesh. Journal of Contemporary Asia, 34(1), 33–54. Papanek, G. F. (1967). Pakistan’s development, social goals and private incentives. Harvard: Harvard University Press. Rahman, M. (2007). Market-State-Civil Society Relations and Development in Post-Independent Bangladesh: Some Theoretical Reflections. Bangladesh e-Journal of Sociology, 4(2), 4–15.

108 

M. D. MIAH AND Y. SUZUKI

Sarker, A.  E. (2008). Patron-Client Politics and Its Implications for Good Governance in Bangladesh. International Journal of Public Administration, 31(12), 1416–1440. Sobhan, R. (1980). Growth and Contradictions within the Bangladesh Bourgeoisie. Journal of Social Studies, 9, 1–27. Sobhan, R. (1991). An Industrial Strategy for Industrial Policy: Redirecting the Industrial Development of Bangladesh in the 1990s. The Bangladesh Development Studies, 19(1/2), 201–215. Suzuki, Y., Miah, M., & Jinyi, Y. (2008). China’s Non-Performing Bank Loan Crisis: The Role of Economic Rents. Asian-Pacific Economic Literature, 22(1), 57–70. Uddin, S. (2005). Privatization in Bangladesh: The Emergence of ‘Family Capitalism.’ Development and Change, 36(1), 157–182. Uddin, S., & Hopper, T. (2003). Accounting for Privatisation for Bangladesh: Testing World Bank Claims. Critical Perspectives on Accounting, 14(7), 739–774.

CHAPTER 6

Non-market Allocation and Rent Seeking

6.1   Introduction The approach of property rights to the study of economics has been promoted by the market-oriented analysis or upon the price mechanism. Demsetz (1964) attaches the importance of private property to the fact that it works as a guidepost for efficient resource allocation among alternative uses. Property, when perfectly delineated, gives a signal about where to put resources for maximum utility. Demsetz (1964) further argues that zero pricing of scarce goods might not necessarily cause inefficiency if exchange cost is high. In contrast, zero pricing of public goods may result in inefficiency because it fails to signal whether resources could be used in more useful ways. Thus, resource distribution through price mechanism, where the provision of market is available at a reasonable cost, leads to a greater social utility than the non-price mechanism. In the real-world scenario, we experience many transactions involving non-market allocation of resources executed by government regulations. For example, government regulation is deemed acceptable in such cases as defense, police force, money supply, court system, and so on because the market would fail to price such public goods. Moreover, government may also intervene in the market where price signal is available, mainly in order to increase the performance of the economy or to achieve more equitable distribution of income and wealth than the market. Many goods and services for which initial allocation is possible through the market or price

© The Author(s) 2018 M. D. Miah, Y. Suzuki, Power, Property Rights, and Economic Development, https://doi.org/10.1007/978-981-13-2763-6_6

109

110 

M. D. MIAH AND Y. SUZUKI

mechanism are also allocated by such non-market mechanisms as first-­ come-­first-serve basis, lottery, and voting systems. For example, land was assigned on a first-come-first-serve basis during the 1889 Oklahoma Land Rush (Che and Gale 2009). It is not uncommon that emission rights, import quota, fishing rights, and broadcasting spectrum rights are assigned by non-market mechanisms. It is reported that 82 percent of Singaporeans live in houses provided by the state through lottery system. Tu and Wong (2002) argue that housing problem in Singapore has been resolved by the state-initiated housing allotment. The price of these houses is determined not by the market but by government policies. The same strategy worked well in South Korea, where new housing units were subject to price cap and were assigned by lottery (Green et  al. 1994). In the case of both Singapore and South Korea, non-market allocation has been effective because it enhances the overall social welfare through the redistribution of resources. The primary logic of allocating resources through non-market mechanism, even if price signal is possible, is that either the price mechanism for initial allocation is biased or the redistribution of resources is required for welfare enhancement. From the perspective of Coase (1960), it does not matter whether government or market allocates resources initially so long as the transaction cost is zero because economic agents’ interactions will bestow rights to those who value them most. Of course, the assumption of zero transaction cost is unrealistic. Even if a world of extremely low transaction cost is assumed, agents’ limited capacity in terms of available asset as well as liquidity constraint might refrain them from showing true willingness to pay (Salant 2004). For instance, if two bidders, one having no liquidity constraint and the other facing liquidity constraint, bid for a radio spectrum, allocative efficiency will not be the same regardless of who owns the initial right. If the right is assigned initially to the latter bidder, the former will be able to buy if he has a higher value for the asset. In the case of reverse allocation of initial rights, this transaction may not occur even if the non-owner values it more than the initial owner because of liquidity constraint. Moreover, the liquidity constraint will have a significant negative impact on future transactions whenever the goods being assigned have a larger value relative to agents’ buying ability. Believing in the benefits that could be derived through non-market allocation, the government of Bangladesh has attempted in numerous occasions to distribute resources through various non-market mechanisms. These interventions are often well-meaning, being designed to

  NON-MARKET ALLOCATION AND RENT SEEKING 

111

achieve ends that are thought to be socially desirable. However, the efficiency of non-price mechanism relies on other important factors, including the cost of redistribution and the forms of non-market mechanisms. It was mentioned earlier that the capacity of a state determines largely whether a non-market distribution is welfare-enhancing or welfare-­ reducing. Political leaders seek support from various groups in their bid to strengthen the political power or seek legitimacy for regime validity. This practice facilitates the evolution of a strong patron-client network in which the patron at the top provides clients with privileged access to state-­ sponsored properties in exchange for their support. Thus, rent seeking is often the result of such cases where government can distribute resources through non-market mechanisms. Because of pervasive rent seeking, nonmarket allocation generates by-products, including corruption and bribery, which remain unanticipated by policymakers. At worse, policymakers themselves benefit from such actions. Rent-seekers’ quest to capture rent erodes social benefit intended to achieve through non-price allocation. Particularly in a weak state, the unproductive patron-client network tends to be interlocked under the fragmented structure of political power. Evidences from the literature show that non-price mechanisms such as quota, lottery system, first-come-first-serve basis, and restricted licensing and permissions have been the target for rent seeking (Goeree and Holt 1999; Hillman 2013; Tullock 1989). In line with this argument, we present different cases. The first case is related to restricted licensing. We present the scenario of broadcasting frequency allocation for private television channels in Bangladesh during different government regimes. The second case depicts the scenario of land allocation developed and managed by government agencies and distributed through lottery system. The third case portrays the functional weakness of some governmental agencies revealed by the allocation of building permits.

6.2   Allocation of Television Broadcasting Frequency In a Supreme Court case, Chowdhury Mahmud Hasan and Others v. Ekushey Television and Others,1 the plaintiff instituted the suit alleging that the birth of Ekushey Television (ETV) was illegal. Thus, its license should be revoked by the court order. The plaintiffs further complained that the entire process of granting rights over the broadcasting frequency was totally politically

112 

M. D. MIAH AND Y. SUZUKI

motivated. Despite ETV aired its program as a private entity, it was allowed to use the terrestrial system, which was originally owned by the Bangladesh Television (BTV, the only state-owned television channel of the country). Furthermore, ETV was allowed to use BTV’s premises for Key Point Installation (KPI). This was one of the most controversial decisions made by the Awami League (AL) during its tenure of 1996–2001. BTV operates one national terrestrial channel with coverage of over 90 percent of the country’s landmass. Also, it holds a second very high frequency (VHF) for a television channel. In the regulatory term, BTV operates under the auspices of the Ministry of Information, from which it receives funding and directions for organizational and functional activities. Needless to say, BTV lost its popularity due to mismanagement and low-­quality programs (Deepita 2006). This created a vacuum in the television broadcasting market of the country. As a result, a channel named ‘ATN Bangla’ was issued license in 1997 as the first private TV channel in Bangladesh, which was followed by another channel called ‘Channel i’ in 1999. However, BTV was the only television channel with huge investment for its KPI and terrestrial facility. Because of its wide coverage and heavy investment in infrastructure, BTV enjoyed a natural monopoly in airing programs. In 1998, the Ministry of Information invited tenders requesting proposals from local and foreign firms, individually or under joint venture, to install and operate a private television channel. A total of 17 companies participated and submitted their proposals in the tender, which were sent to the technical committee for screening and evaluation, based on certain preset criteria, and one application was declared commercially unsuccessful. The remaining 16 companies were divided into three categories: the top three enterprises were classified satisfactory whereas the second category comprised three enterprises whose proposals might be considered upon modification, and the last 10 enterprises were categorized unsuccessful, in which category the defendant (ETV) belonged to. The report was then forwarded to the Ministry of Information for further processing. Subsequently, the technical committee prepared a new report, for reasons unknown to the public. The defendant stood at the top in the new list. Also, another applicant who belonged to the unsuccessful category in the earlier list stood second in the new list. Moreover, Multimode Transport Consultant Ltd., which secured the top position in the initial list, was placed at the bottom of the new list. In the new report, it was mentioned that 8 enterprises’ proposals out of 17 could be considered with some conditions. Surprisingly, the conditions were not sent to all

  NON-MARKET ALLOCATION AND RENT SEEKING 

113

participants, and also, it remained a secret why these conditions were set out even though three proposals were found satisfactory initially. Finally, ETV was given the license to start its operation in April 2000. It was a great surprise that ETV was allowed to use BTV’s terrestrial system whereas two already existing private channels, which came into being before ETV, were not given the same privilege. Moreover, a question was raised as to whether such dealing (the privilege for ETV to use BTV’s terrestrial system) involved breaches of constitutional obligations and statutory duties regarding public property. ETV was a private channel which was allowed to use state property acquired at the expense of taxpayers. It was thus argued that the decision to grant broadcasting license to the defendant was made based on a mala fide report. In the proceedings, the High Court Division of the Supreme Court affirmed that claim: Our concern is about the way, manner and the procedure which were followed to come to a decision by the technical committee. We are of the view that there was something wrong somewhere which the respondents very carefully and consciously tried to keep out of the knowledge of the Court. On this ground, we are of the view that the whole transaction and evaluation is mala fide.

The Court also questioned the transparency with which the government pursued the recommendations of the report: We are further of the view that the action taken by the Ministry of Information on the basis of the second report is also not transparent. The ministry considered this report as ‘final’, but we have found that it is not at all a final report; it is an incomplete and conditional report. The ministry processed only the case of ETV (defendant) without trying to know from the evaluation committee as to what are the conditions required to be fulfilled, the ministry itself determined those conditions required to be fulfilled, the ministry did not inform the other 7 parties as to whether they are ready to fulfill the conditions. It is not known how and why the ministry came to the conclusion that only the ETV was agreeable to fulfill the conditions and the other 7 parties were not agreeable.

The court thus concluded that the act of considering the proposal of ETV as most responsive and deserving candidate by the Ministry of Information was done without any lawful authority and was of no legal effect. The defendant appealed to the Supreme Court against the High Court’s verdict, but the division bench concurred with the High Court’s decision.

114 

M. D. MIAH AND Y. SUZUKI

The defendant then appealed for a review petition. The original verdict was upheld by the Review Bench. Finally, the defendant’s right to air its programs as the first private terrestrial TV channel was revoked. All the equipment of ETV was seized by the government.2 No doubt, ETV created a good social utility by disseminating important information to the people living even in remote areas of the country and hence created a social awareness among mass population.3 The terrestrial system, which ETV was allowed to use, bestowed it with a huge public outreach. Definitely, its popularity was overwhelming. In this sense, the abrogation of ETV’s right to air as a private terrestrial system goes against public interest. This scenario throws important light on the analysis of rent seeking evolving through property rights distribution. First, in the view of the court, the decision as to ‘who should own the right’ was governed by nepotism and patron-client relation instead of legal norms and practices. Moreover, revoking the license implies that any right secured through such patron-client relation is not guaranteed. This tendency tempts prospective rent-seekers to contest for securing new rights or reverse already allocated rights. As a consequence, rent-seeking contest increases, which results in high rent-seeking cost. Second, ETV was born during the AL tenure and the license was terminated in a different political regime. ETV survived successfully for four years without any resistance. The resistance started to appear when the AL was defeated by Bangladesh Nationalist Party (BNP) in the 2001 national elections. Taking this point into account, it can be inferred that the fortunes of party loyalists change with the change of political regime even if the change does not bring overall social benefits. The BNP, after assuming power in 2001, aired the same show. Licenses for a dozen satellite private television channels were issued during the tenure of the BNP-led coalition government (2001–2006). Most of those were in the possession of party ministers or party loyalists. This time, licenses were issued without proper scrutiny. It is reported that Channel i and ATN Bangla (they got license without political influence) had to follow an arduous procedure for obtaining their license. The scenario has changed subsequently. The fiesta of issuing license during the BNP tenure started when a lawmaker of the BNP cabinet and also the former private secretary of the prime minister bid for a license. It took only 18 days after the submission of the application to issue the license for ‘NTV’ in 2004 (A. R. Khan 2007). Moreover, the channel was also allocated frequency within a week

  NON-MARKET ALLOCATION AND RENT SEEKING 

115

by the Bangladesh Telecommunication Regulatory Commission (BTRC). Necessary equipment for establishing the facilities for NTV were imported free of tax. Another license was issued for ‘RTV’ to the same owner. The flexibility of obtaining license leveraging on political power and maneuvering the legal and administrative requirements motivated other parliament members (MPs) to compete for private television channels. License was issued for another private TV channel named after ‘Bangla Vision’. The incumbent mayor of the Dhaka City Corporation was involved in the bid for license (A. R. Khan 2013). The application for this channel was lodged on May 30, 2004, and the license was issued on January 31, 2005. However, the channel was provided with the international telecasting frequency by the BTRC within five days. Other two TV channels which obtained license on the same day of Bangla Vision were ‘Channel 1’ and ‘Boishakhi TV’. They received their license within 26 days from the Ministry of Information, whereas the BTRC allocated frequency within a week. ‘Channel 1’ is owned by a close business partner of the BNP’s senior joint secretary and the son of the then prime minister, Khaleda Zia. He solely owned 25 percent of the stake, whereas another MP, who was the chairman of the channel, owned 12 percent (Khan 2007). On the other hand, Boishakhi TV was owned by the former BNP-­ led coalition minister in charge of housing and public works. While there were about 50 applicants waiting for the license, only two—‘SNTV’ and ‘Islamic TV’—were granted license. Satellite National Television (SNTV) was owned jointly by two ministers of the BNP-led government whereas the other one, Islamic TV, was owned by the prime minister’s brother, who was also an MP at that time.4 The regime closed its fiesta by allowing license for Focus TV just two weeks before the regime handed its power over to the caretaker government. A total of ten licenses were issued during the 2001–2006 BNP tenure and all were given to party loyalists. The AL won the 2008 parliamentary election and followed the same tradition of the BNP in giving licenses for private television channels. In the first phase, the government approved more than a dozen channels; all were owned by party MPs, some of whom were ministers either of the current cabinet or of the past.5 There were 13 more channels to get the license. Some of the top leaders of AL applied for the license. For instance, the former minister in charge of Forests and Environment Ministry applied for ‘Green TV’; the former state minister for liberation war affairs recommended approval for ‘Titas TV’; information adviser to the prime minister applied for ‘Dhaka Bangla Television’; a female MP as well as a popular singer backed the application of ‘Millennium TV’ (Shoesmith et al. 2013).

116 

M. D. MIAH AND Y. SUZUKI

Successive governments of Bangladesh not only issued licenses to their intimate cohorts but at times revoked some license issued during the regime of opposition parties. For instance, the military-backed caretaker government (2007–2009) shut down CSB, news casting television channel, in 2007. During the AL tenure, Channel 1 was shut down. Similarly, the license of Diganta TV and Islamic TV were cancelled by the AL government. The reasons why politicians target private television channels is not a secret anymore. They believe that owning a television channel would earn them political muscle over their prospective competitors because when necessary (most frequently though), these channels function as party mouthpieces. In addition, they work as a source of profit and prestige. Needless to say, businessmen-cum-politicians have turned politics into a way of doing business profitably. As shown in Chap. 5, representation of businessman-cum-politician in the parliament increased tremendously over the last few years. This tradition clearly indicates the power of money in the politics of Bangladesh.

6.3   Residential Plot Allotment Through Lottery System The City Development Authority (Rajdhani Unnyan Kartipakkha, which is abbreviated in Bengali as Rajuk) is one of many government organs that take part in various development activities of the country. The primary functions of Rajuk are to authorize building construction plans and ensure that these establishments are built strictly maintaining building codes prescribed by Rajuk. Moreover, it has been entrusted to acquire land under the Town Improvement Act 1953 for area development and allot those developed land as plots to the citizens who have contributed to the development of the country. The following analysis will show that Rajuk has become a breeding ground for rent seeking. Transparency International Bangladesh (TIB) in its several reports has revealed that Rajuk is heavily engaged with corruption and bribery. TIB further estimates that the annual payment of bribe for Rajuk’s approval of building plan roughly amounts to US$3 million (A.  Mahmud 2007). Almost all construction plans have to pay bribe for getting Rajuk authorization, which results in lax conformation of Rajuk building code (Sabet and Tazreen 2015).

  NON-MARKET ALLOCATION AND RENT SEEKING 

117

Plots developed and allotted by Rajuk are hot cakes because the distributed price is substantially lower than the market price. This means that the demand for such plots is enormous. If eligible candidates are more than the available plots, lottery is the ultimate solution. The first phase of plot allotment was initiated under the Dhaka Improvement Trust (DIT) in 1966. DIT developed the plots, but because of political uncertainty, it could not accomplish the task until 1992, when Rajuk first allotted plots during the BNP regime. About 6000 plots of different sizes on 950 acres of land were allotted in the first phase. Even though the plot allotment was accomplished during the BNP tenure, the procedure was started during General Ershad’s (military dictator) regime (1981–1990). It is reported that Ershad maneuvered the process so that his followers received a lion’s share of those allotted plots. The defunct Anti-Corruption Bureau filed a case in 1991, accusing him of influencing Rajuk to allot some plots to his 49 intimate cohorts.6 He was finally acquitted from the charge in 2006 on the grounds that he allotted plots to renowned people who had contributed admirably to the nation. However, the court observed that the head of Rajuk and the ministry concerned prepared all the procedures on which General Ershad just approved. Thus, any irregularity should be brought against these institutions, not against Ershad.7 The second phase of allotment began in 1992 and was completed in June 1998. A total of 5315 residential plots on 438 acres of land were allotted. The AL was in power after 30 years and people’s expectations and enthusiasm toward mitigating corruption, accelerating economic growth, and stabilizing the overall economy skyrocketed. However, these expectations were never realized. The political activities of the AL  only exacerbated the situations instead of healing them (Kochanek 1996). The most embarrassing and controversial deal the AL accomplished was the decision to allot 301 residential plots in the highly desirable residential areas (Gulshan, Banani, and Baridhara) of the country in July 1999. Rajuk invited applications accordingly. A committee was formed to prepare a preliminary list of allocations and to publicly notify the list in at least one Bengali and one English language newspaper. Also, the committee was assigned to review objections and complaints registered in response to the preliminary list and to prepare a final list within six weeks of the publication. A preliminary scrutiny found 13,000 applications eligible for consideration. A point worth to mention is that Rajuk does not have any specific guidelines applicable for land allotment. Guidelines are prepared ahead of

118 

M. D. MIAH AND Y. SUZUKI

each allotment. This leaves an enormous discretion to the party in power for circumventing the process. Criteria for the third phase included allotment of plots to those who had rendered remarkable contributions in government service, public service, or fields of national importance; first preference was supposed to be given to those whose property in the area had been acquired for development, and exclusion of those who had been allotted plots in the past. Deviation from these norms was found occasionally. In Md. Abu Bakar and others vs. Bangladesh and others,8 the plaintiff filed a petition complaining that despite his land being acquired, he did not receive any compensation from Rajuk for developing plots even though he was entitled to receive it as an affected person. The High Court issued a show-cause notice to the defendant in response of which the defendant (Rajuk) opposed the rule, arguing that all plots were allotted already to other persons and there is no scope for allotment of any plot to the petitioner. The High Court then made the rule absolute and ordered Rajuk to work according to the law. The respondent then appealed to the Supreme Court against the rule and the Supreme Court affirmed the High Court decision. However, the Supreme Court clarified the validity of the rule, stating that the High Court ordered the respondent only to act in accordance with the law. If the plaintiff is entitled to receive a plot according to the stated condition, Rajuk should not deviate from this rule. For everyone’s surprise, neither the Supreme Court nor the High Court considered the already stated condition that an affected party deserves preference to receive a plot. Rather, the AL followed the tradition of its predecessors. This time interference directly came from the Prime Minister’s Office (PMO) and also from different ministers. Internal conflict flared up because the influential candidates were more than the available plots. It was alleged that the list of successful applicants was prepared not by Rajuk but by the minister of Public Works and Housing.9 In the halfway of the process, the housing minister was transferred to another ministry for unknown reasons. A new minister assumed the responsibility of the housing ministry. The earlier list of successful applicants, which was announced by Rajuk, was revised under the supervision of a new minister. Again, the new list was said to have further revised by a group affiliated with the PMO.10 Conflicts for the list preparation at the political level left the formal committee with no role to play during the entire process. Even though the list was supposed to be published in at least one Bengali and one English newspaper, the lapse occurred in this regard too. Only one obscure Bengali

  NON-MARKET ALLOCATION AND RENT SEEKING 

119

newspaper published the list in July 1999. The list included 11 cabinet ministers, 62 MPs, 7 officials in the PMO, and more than 100 relatives of party leaders.11 The release of the list was followed by tremendous public outcry fueled by general applicants, bureaucrats, Rajuk officials, and the AL leader who were excluded from the list. Political activities of the government were severely criticized by the media and intelligentsia. Amidst this criticism, the prime minister cancelled the allotment. Rajuk prepared for another round of phase 3 plot allotments in 2004 during the BNP tenure. It was initially decided to allocate 50 plots. After inviting applications, 535 candidates submitted the application, 80 of whom came from ruling party alliance.12 Rajuk was in a dilemma how to satisfy even the politically affiliated applicants. The same conflict as the last one was sure to appear once again. To avoid this cumbersome situation, Rajuk increased the number of plots to 100 and allotted them first to those associated with the ruling party. The final list showed that 96 recipients were from the ruling party members and their relatives. The list comprised 19 ministers, 52 ruling coalition MPs, the mayors of two city corporations, two advisers of prime ministries, the son of the incumbent president, sons of ministers, and ruling coalition lawmakers.13 Rajuk announced the next allotment and invited applications under 12 categories for about 6640 plots in 2004 again during the BNP tenure. The lottery was drawn in 2005 for three categories—private job holders, businessmen, industrialists and others, and the names of the winners of 1136 plots were disclosed. It was revealed that a secret allotment of about 500 plots was granted after the names of the first two sets of winners had already been announced.14 However, the list of those secret allottees was not disclosed. When the chief engineer of Rajuk was unwilling to approve the allocation of those 500 plots, he was forcibly sent to retirement in 2006 immediately before the BNP-led coalition government handed the power to the caretaker government.15 After challenging the decision of his retirement, the court honored him, restoring him in his previous post, proving him innocent while endorsing that the secret allotment was real. The remaining plots of the third phase were allotted to people of nine categories, including ministers, lawmaker, judges, freedom fighters, journalists, artistes, litterateurs, and sports personalities. During this phase, Rajuk authorities changed its earlier guidelines. It included a provision for giving plots to expatriate Bangladeshis and increased the quota in this category from 10 to 20 percent. This particular provision was named ‘genuine and deserving’ category, which was truly vulnerable to political bias.

120 

M. D. MIAH AND Y. SUZUKI

A total of 897 plots were allotted under this category and almost all plots were assigned to politicians, bureaucrats, ward commissioners, and their relatives loyal to the BNP alliance and ministers.16 Moreover, the selection method of this category was supposed to conform to Clause 8 of Dhaka Improvement Trust Rules, 1969. According to the rules, every applicant has to submit an official declaration that he or she does not own any property in the city. Majority of plot recipients under this category owned plots in different parts of the city at that time. An interim caretaker government after assuming power formed a committee and found irregularities of this category of plot allotment, and thus, cancelled the allotment.17 These cases shed important light on the rent-seeking tendency of the country. Rent created and maintained by the non-market allocative mechanism attracted large number of contestants to seek rents. Since the available resources were not sufficient to satisfy all the political contenders, the excluded groups revolted, which resulted in cancellation of plot allotment in several occasions. This conforms to the literature that in a fragmented state, independent monopolists sell rights, but these rights are not accompanied by credible commitment, again tempting prospective rent-seekers to vie for rents.

6.4   Allocation of Initial Rights: Evidence from Construction Permits It is argued in Coase (1960) that the initial assignment of rights is crucial for maximizing social benefits when transaction cost is positive. If market transactions are costless, all that matters is that the rights of various parties should be well defined, and the result of legal actions is easy to forecast. Coase discusses several legal cases to illustrate the importance of initial allocation and how the legal system reacts to transaction cost. One such case is Kersey v. City of Atlanta (Coase 1960: 25).18 Mr. Kersey purchased a piece of land and built a house on it. After some years, the City of Atlanta constructed an airport adjacent to the house of Mr. Kersey. The plaintiff complained that after the construction of the airport, the intensity of dust and noise increased, and the low flying of airplanes caused by the operations of the airport rendered his property unsuitable as a home. In their verdict, the judges argued that the noise and dust were incidental to the proper operation of an airport and hence cannot be considered nuisance. However, for the complaint against the low-­ flying operations of the airport, the judges had different opinions:

  NON-MARKET ALLOCATION AND RENT SEEKING 

121

[C]an it be said that flights … at such a low height as to be imminently dangerous to … life and health … are necessary concomitant of an airport? We do not think this question can be answered in the affirmative. No reason appears why the city could not obtain lands of an area [sufficiently large] … as not to require such a low flight.

The court’s view was that the residents, including Mr. Kersey, had been already living in the place where the airport was built subsequently. If the airport requires low-flying operations, the residential area is not the right choice to locate it. This fact recognizes the initial right of the residents by the law of first possession. However, the court further argued that “if it is indispensable to the public interest that the airport should continue to be operated in its present condition, it may be said that the petitioner should be denied injunctive relief”. Coase interprets the above decision of the court through the lens of transaction cost. He views that the court wanted to avoid the greater harm under the excuse of public interest. If, for example, the injunction relief was granted to Mr. Kersey, the airport would have to be relocated, in which case the social cost would have been enormous. Or, the airport must offer compensation to the residents so that they leave the noisy and dusty area and relocate themselves in a place which they may consider more peaceful. However, reaching an agreed-upon compensation through bargaining with so many residents involved huge transaction cost. In ­contrast, it would be easier, from a social point of view, to decide if Mr. Kersey accepts the noise and dust resulting from the usual operation of the airport or relocates to a better habitat. A similar case is reported in the Supreme Court of Bangladesh. In A Rouf Chowdhury and another v. Bangladesh and Others (Rajuk),19 the plaintiff is the owner of ‘Rangs Bhaban (building)’, a 22-storied shopping-­ cum-­office building situated near an airport. The building was built upon receiving appropriate approval from the concerned authority, Rajuk. While Rangs Bhaban was completed up to the sixteenth floor, objection was raised by Bangladesh Air Force Head Quarters, requesting Rajuk to demolish any adjacent high-rise construction beyond the permissible height certified by the Civil Aviation Rules (CAR). As per the CAR, construction of Rangs can be permitted up to the sixth floor. Rajuk issued an order to the plaintiff to demolish the construction beyond the sixth floor within 10 days at the cost of the plaintiff, failure of which would make the building unauthorized and illegal. Rajuk did not receive any reaction from

122 

M. D. MIAH AND Y. SUZUKI

the plaintiff within the stipulated time, and hence, revoked the plan of the building in June 1999. The plaintiff then filed a lawsuit in the High Court Division of the Supreme Court in May 2000, where the demolishing order was rejected. The judges in their verdict stated that the concerned authority (Rajuk) actually neglected the question of legality and/or propriety while adopting the decision of canceling the permission of constructing the building. The court further emphasized that the construction undertaken so far, spending several millions of monetary costs and also as per the plan duly approved by Rajuk, must be held to be a property lawfully vested to the plaintiffs. However, instances are plenty which show that merely obtaining an approval from the concerned authorities and the amount of expenditure already incurred in the proposed site do not create an absolute vested interest for the relevant party. These facts are reflected in the Bijoy Kumar Chakroborty v. Md. Muzaffar Hossain.20 The defendant-petitioner intended to construct a cinema hall within the vicinity of the locality which is a residential area where a temple, mosque, madrassa (institutions for Islamic education), and hostel to accommodate madrassa students are located. In this pursuit, the defendant duly obtained a no-objection certificate from the concerned authority and started construction. While a substantial part of the proposed construction was completed, the plaintiff field the suit on the plea that if the cinema hall is set up in the midst of a residential area, the social and natural environment of the local people will be disturbed, and peaceful atmosphere of public life will also be seriously affected. The trial court decreed the suit. The defendant then appealed to the appellate division of the trial court, where the earlier decision was affirmed. The petitioner then approached the High Court Division, where the rule was discharged. He then filed a petition in the appellate division of the High Court, where the petition was dismissed. The appellate division argued: The construction of a cinema house involved consideration of various other facts, such as the suitability of the site, its proximity to places of worship, the inconvenience likely to be caused to residents of the locality and other factors which were not specifically required by the Act to be taken into consideration for the purpose of license under the Act. The practice grew up from 1935, in pursuant of certain instructions issued by the Government, of first obtaining a no-objection certificate…before commencing the construction of a cinema house at particular site.

  NON-MARKET ALLOCATION AND RENT SEEKING 

123

The above statement clarifies that merely obtaining an approval does not create a vested right because there are other conditions, including social norms and values, which have been practiced over the years, and hence, should be taken into consideration even though they are not clearly spelled out by the relevant Act. The court further instructed to demolish the construction already completed. In the Rangs Bhaban case, the High Court order created a dilemma for Rajuk because the Civil Aviation Authority of Bangladesh (CAAB) pressed to demolish the building for safe landing and takeoff operations of the airport whereas the High Court issued a stay order. The defendant then appealed to the Supreme Court, where the High Court’s decision was overturned in August 2007. The original plan for a 10-story shopping-cum-office complex on the eastern side of the airport (known as Tejgaon old airport) was submitted to Rajuk in December 1988 for approval. Rajuk approved the plan in July 1989, keeping aside the permission of the CAAB. However, the plaintiff was asked to obtain permission on its own to fulfill the requirements of building codes for any construction undertaken near an airport. The construction of the building began in 1989 without CAAB approval. ­ Within a year, the Rangs Group extended the construction activity to another adjacent land even without informing Rajuk. Moreover, the first plot was a Waqf (charitable) property—donated under Islamic trust for public benefit. Therefore, any construction on the plot required a clearance from the Waqf administrator under the Bangladesh Waqf Ordinance 1962. The clearance was never sought. The plaintiff, instead, submitted a revised plan for constructing a 22-story complex in January 1990, which was also approved by Rajuk in May 1990, again without permission from the CAAB. Looking at the current lawsuit through the lens of Kersey v. City of Atlanta, it can be stated that the High Court of Bangladesh erred by rejecting Rajuk’s order to demolish the impermissible height of the Rangs. As per the first possession rule, the airport should have possessed the right to freely operate. Second, the High Court evaded the question as to whether the airport should be relocated because its proper operation was obstructed by the Rangs, which, in the court’s eye, preserved the right to stand high. The Supreme Court considered these facts and rightly overturned the High Court’s order. The Rangs building per se may seem to appear a simple and standalone case. However, it is a symbol that bears testimony to the role money politics can play in Bangladesh to maneuver the allocation of rights. A prominent daily newspaper summarizes:

124 

M. D. MIAH AND Y. SUZUKI

Over the years, the Rangs Bhaban has, in the public perception, come to be a towering reminder of the intrinsic inadequacies of the law-enforcement system, the systemic mismanagement, ineptitude and corruption of the city development authorities (Rajuk) and, most importantly, the apparently incorrigible pro-rich bias of successive governments and, by implication, the state. Everything about the 22-storey building is a mockery of whatever laws, rules and regulations that we have on possession of land and construction.21

Our analysis of ‘plot allotment through lottery’ shows the inefficiency of Rajuk. In other words, Rajuk functions as a mediator for distributing the state’s resources to the ‘pro-rich’, as the dailies have mentioned rightly. Rajuk approved the construction plan submitted by the plaintiff for approval. On the other hand, it ordered the demolition of impermissible heights when the CAAB asked to do so. It proves that Rajuk has no effective and independent roles to play. During the trial, Rajuk spontaneously confessed its mistake. However, proclaiming this phenomenon merely a mistake hides the real scenario. Initially, Rajuk was not in favor of approving the plan due to improper documentation, one of which was the nonconformity to CAAB rules. The plaintiff was an influential businessman who allegedly had a personal connection with the then state minister, Sheikh Shahidul Islam, of the General Ershad cabinet (1981–1990). The minister lobbied on behalf of the plaintiff for approval. Rajuk, however, managed to bypass the direction of the state minister but could not stay when General Ershad himself directly intervened the process.22 Capitalizing on his political power, the plaintiff managed to acquire not only the land but also the right to construct the building. However, the CAR was a big trouble for Rangs’ ‘go-sky-high’ desire. The airport was declared abandoned by General Ershad.23 Although both international and domestic operations of the said airport had already been shifted to a new place in 1981, the airport was continuing to be used as an operational base for the Air Force and sometimes as a domestic airport. It was further reported that an engineer of Rajuk who rejected the plan of Rangs was removed from his job. Change of political regime motivated the engineer to challenge his removal decision in the court. The court eventually restored him to his previous post (Saad 2007). The ultimate fall of the dictatorial regime facilitated the emergence of the parliamentary democracy in 1991. The BNP-led government seized the documents related to the property and a parliamentary standing committee raised questions about the legitimacy of Rangs Bhaban. Moreover,

  NON-MARKET ALLOCATION AND RENT SEEKING 

125

the now-defunct Bureau of Anti-Corruption and Rajuk jointly launched inquiries into the case. Specially, the housing minister showed a tough stance as though he wanted to see an end of the episode. The primary concern of the minister was that such a high-rise building should not be allowed in a residential area. Rajuk then elevated the status of the area from purely residential to residential-cum-commercial area. Amidst all these, Rangs surprisingly revised its plan again in 1993 to change the status of the building from residential-cum-industrial to an exclusively industrial building. The social consequence of such a tendency is critical. For example, the master plan of the Dhaka city shows that a road was proposed to be constructed across the land where the Rangs Bhaban was located. Even though traffic congestion has transformed into an endemic national problem in Dhaka city, successive governments ignored this fact merely to protect the interest of the ‘pro-rich’ of the country. This simple public interest provides enough ground to revoke the construction right of Rangs. Let us examine the verdict of Sharif Nurul Ambia v. Dhaka City Corporation.24 The plaintiff is an organizing member of a political party in Bangladesh with his party office located adjacent to a vacant space belonging to the Public Works Department (PWD). The space was assigned initially for the construction of a public car parking center. In 1986, the PWD transferred the land to Dhaka City Corporation (DCC), which started earth-digging on the land for the purpose of undertaking some construction for a multistoried shopping complex. After completion of a certain amount of digging work, DCC left the space open for a long time. Due to logging of rain water and other abuses, the suit property turned into a small pond and the obnoxious garbage deposit started to threaten the life and environment. Thus, the plaintiff was constrained to file the said suit in the High Court Division of Supreme Court. The court stated that the temporary obnoxious smell from the proposed construction site does not construe any right to the plaintiff to ask for injunction and to stop the construction. The question is whether sufficient care and general procedures have been maintained in the course of construction. The judge also argued: If the construction is at all raised then only the question will arise as to whether the respondent has left sufficient space around the proposed building as prescribed for free flow of light and air and that inconvenience or discomfort for obstruction of light and air must be of substantial character to warrant a legal interference; the petitioner having not been able to ­produce sufficient material in order to establish his case the writ petition is premature.

126 

M. D. MIAH AND Y. SUZUKI

The High Court thus dismissed the petition and declared that the rights of the plaintiff were not violated because of obnoxious smell during its construction. This argument conforms to an English case, Andreae v. Selfridge and Company Ltd.25 The judge, Sir Wilfred Greene, noted: [W]hen one is dealing with temporary operations, such as demolition and re-building, everybody has to put up with a certain amount of discomfort, because operations of that kind cannot be carried on at all without a certain amount of noise and a certain amount of dust. Therefore, the rule with regard to interference must be read subject to this qualification…

There is no question that the High Court was right in Sharif Nurul Ambia v. Dhaka City Corporation for not considering the plaintiff’s objection. However, a perspective which the High Court did not ponder bears an important relevance to our stated issue of property rights. Upon the High Court’s rejection, the plaintiff appealed to the appellate division, and interestingly, the judgment was reversed. The court of appeal noted that such an act of a government organ like DCC, which is entrusted to protect the public interest is an instance of subversion of the respondent by playing the role of environmental exploiter. The court of appeal also argued that the High Court Division failed to consider that in the Master Plan the said land was reserved for a public car parking center, and thus, any construction violating the plan is illegal and against the public interest. If this judgment remains valid, the High Court in A Rouf Chowdhury and another vs. Bangladesh and Others made an obvious error by completely ignoring the issue of public convenience caused by blocking the road proposed in the Master Plan. It is not possible to precisely estimate the cost and benefit derived from the existence of Rangs Bhaban, but even a layman can predict that the plaintiff had to incur a significant amount of monetary and non-monetary cost to survive illegally for so long period of time. Not only that the rent-seeking cost was enormous but also the rent-­ seeking output was inefficient. Rangs Bhaban is not the sole concern so that such a phenomenon can be ignored. Dozens of such illegal constructions have been built surrounding the airport. Noteworthy among them is the office of Bangladesh Garment Manufacturers and Exporters Association (BGMEA), which is located just a few hundred yards away from the Rangs Bhaban. A 15-story corporate headquarter of BGMEA was built in a wetland without the permission of relevant authority, notably Rajuk. The place where the BGMEA building

  NON-MARKET ALLOCATION AND RENT SEEKING 

127

has been constructed is one of the most crucial water drainage points in Dhaka city because it is the largest rainwater conservation spot. After construction of the BGMEA building on the said land, general water flow of the city has been severely obstructed, causing serious public inconvenience. Amidst the controversy, the BNP-led alliance officially leased three large plots in the same canal area to Millennium Holdings Limited, which proposed to construct a hotel for the Hilton Hotel chain, Bangladesh Textile Mills Association (BTMA), and the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI). Moreover, the most unfortunate event was observed when the prime minister, Khaleda Zia, laid the foundation stone of the building of BTMA just five days before handing power over to the caretaker government. There may be no clear correlation between the Rangs Bhaban and the BGMEA. However, the matter of BGMEA came into public notice once the court decided the fate of Rangs Bhaban. It will not be wrong to assume that the long survival of Rangs has sent a signal about the state’s built-in weaknesses to root out both the ends and the means of unproductive rent seeking. Those illegal constructions, which have been entitled “city’s architectural marvels and also the marvels of injustice and discrimination”, alone are not the concern for which the state should be much worried. However, they are symbols revealing the weakness of the state and its frequent compromise with interest groups merely for political benefits. Until 2005, the government found that there were 110 buildings constructed violating the CAR, which renders serious threat to the taking-off and landing operations of the new airport. The number of such building increased to 300 in late 2007.26 Regardless of whether the airport should be relocated, or all such buildings should be demolished, economic ­consequences from either of them would be significantly negative for the society.

6.5   Conclusion We have argued in this chapter that non-market allocation of resource fails to achieve the intended objectives in the absence of strong and compatible complementary institutions. Such an activity may encourage unproductive rent seeking and corruption. People spend resources for already produced goods, which is just a social waste. All three cases presented in this chapter show that non-market mechanism has become an important breeding ground of political rent seeking in Bangladesh. This particular allocative mechanism, under the existing political and institutional settings, yields

128 

M. D. MIAH AND Y. SUZUKI

lower net benefits to the society not merely because non-price allocation is inferior to the price mechanism but because the side effects of such allocation are welfare-reducing due to persistent rent-seeking propensity of actors. The first case analyzes the pattern of granting restricted license for private television channels. It is clear from the analysis that the political affiliation influences decisions regarding allocation of rights. Moreover, as predicted by the literature, rights allocated in a certain political regime are not guaranteed because changes in the assignment of rights are often the result of the change in political power. This is also the ultimate message of the second case. The case presents the fact that people spend resources in the form of bribery and lobbying in an attempt to rearrange an existing structure of rights to their favor. Moreover, once the rights are obtained through political process, there is no guarantee that the rights will be secured. We have seen that several phases of plot allotments were cancelled because of serious malpractice involved with the distribution system. This practice has two important implications. First, resources spent on securing rights turn into social waste; second, it gives the message to the prospective rent-seekers to compete in the political rent-seeking market, which, in turn, increases the competition for rent seeking, and hence, the net rent outcome turns negative. Similarly, the third case shows various anomalies on the structure of property rights. We have illustrated a typical problem of how a right is assigned if a building is constructed near an airport that restricts the safe landing and takeoff operations of the airport. Such a problem is not peculiar to Bangladesh, but the peculiarity in this particular regard is related to the political aspect of the problem. This case clearly illustrates how an inefficient initial allocation of rights can create a series of actions that negatively affects social outcome.

Notes 1. Dhaka Law Report, 54 (2002). 2. High Court asks government to decide on ETV license in 30  days, The Daily Star, August 21, 2003. 3. Censorship and human rights, Forum, The Daily Star, Vol. 6, Issue 12, December 2012. 4. 2 more TV channels before polls, The Daily Star, April 26, 2006. 5. Govt. goes for TV Galore, The Daily Star, November 26, 2013. 6. Ershad Acquitted in Yet Another Graft Case, The New Age, September 18, 2006.

  NON-MARKET ALLOCATION AND RENT SEEKING 

129

7. The political circumstance at that time, discussed in Chap. 4, says a lot about his acquittal. To remind the political situation, the BNP was in power and Ershad agreed to form an alliance with the BNP. Considering this situation from the political context at that time sheds enormous light on the real reasons as to why Ershad was acquitted from these graft cases. 8. AD, DLR 58, 2006 (67). 9. Ministers, lawmakers and plots of land, New Age Editorial, March 31, 2005. 10. Corruption: Massive nepotism in Rajuk’s plot allotment, The Daily Star, July 14, 1999. 11. The list containing the names of all ministers, MPs, and other political leaders was published in The Daily Star on July 14, 1999. 12. Prime land monopoly: Fair system the crying need, New Age Editorial, April 30, 2005. 13. Rajuk Plots BNP men grab lion’s share, The Daily Star, March 31, 2005. 14. Irregularities in Rajuk plot allocation alleged, New Age, August 30, 2005. 15. Rajuk cancels 897 new Uttara plots over claims of corruption and nepotism, New Age, February 20, 2007. 16. Irregularities in Distributions: Allocation of 897 Uttara plots cancelled, The Daily Star, February 20, 2007. 17. Supra note 15. 18. Supreme Court of Georgia. 193 Ga. 862, 20 S.E. 2d 245 (1942), reported in Coase (1960). 19. DLR 52, 2000 (HD). 20. Civil revision no 4924 of 1998, DLR 58, 2005 (AD). 21. Editorial, New Age, April 23, 2007. 22. See, for more detail, “Rangs Bhaban is illegal beyond 6th floor” (in Bengali), Shomokal (Bengali language daily), August 3, 2007. 23. Initially, Tejgoan (old airport) was meant to be an alternative airport for international flights. Later the government changed its decision and shortened the runway for operating short takeoff and landing (STOL) service. But STOL flights in Tejgoan Airport were again cancelled. 24. Civil appeal no. 148 of 2002, DLR 58, 2004 (AD). 25. [1938] 1 Ch. 1, reported in Coase (1960). 26. New Age, August 10, 2007.

References Che, Y.-K., & Gale, I.  L. (2009). Market versus Non-Market Assignment of Ownership (SSRN Scholarly Paper No. ID 1328984). Rochester, NY: Social Science Research Network. Retrieved from https://papers.ssrn.com/ abstract=1328984 (on December 21, 2017). Coase, R. H. (1960). The Problem of Social Cost. The Journal of Law & Economics, 3, 1–44.

130 

M. D. MIAH AND Y. SUZUKI

Deepita, N. D. (2006, February 4). From BTV to ETV and beyond: The television revolution. The Daily Star, 15th Anniversary Special, Dhaka. Demsetz, H. (1964). The Exchange and Enforcement of Property Rights. The Journal of Law and Economics, 7, 11–26. Goeree, J.  K., & Holt, C.  A. (1999). Classroom Games: Rent-Seeking and the Inefficiency of Non-market Allocations. Journal of Economic Perspectives, 13(3), 217–226. Green, R.  K., Malpezzi, S., & Vandell, K. (1994). Urban Regulations and the Price of Land and Housing in Korea. Journal of Housing Economics, 3(4), 330–356. Hillman, A. (2013). Rent seeking. In M. Reksulak, L. Razzolini, & W. F. Shughart II (Eds.), The Elgar Companion to Public Choice (2nd ed., pp.  307–330). Edward Elgar Publishing. Khan, A. W. (2013). Private television ownership in Bangladesh: A critical qualitative inquiry (Unpublished Ph.D. thesis). The University of Hong Kong. Retrieved from http://hub.hku.hk/handle/10722/195981 (on September 09, 2017). Khan, A. W. (2007, March 16). 10 TV Channels Licences available in lightning fast speed. The Daily Star, Dhaka. Kochanek, S. A. (1996). The Rise of Interest Politics in Bangladesh. Asian Survey, 36(7), 704. Mahmud, A. (2007). Corruption in Plan Permission Process in RAJUK: A Study of Violations and Proposals. Dhaka: Transparency International Bangladesh (TIB). Retrieved from https://www.ti-bangladesh.org/beta3/index.php/en/seminar-paper/3740-corruption-in-plan-permission-process-in-rajuk-a-study-ofviolations-and-proposals (on January 23, 2018). Saad, H. (2007, August 17). Down the Rangs Alley. New Age Extra, Dhaka. Sabet, D. M., & Tazreen, A. (2015). Governing Growth: Understanding Problems in Real Estate Development in Dhaka, Bangladesh. Journal of South Asian Development, 10(1), 1–21. Salant, D. J. (2004). Up in the Air: GTE’s Experience in the MTA Auction for Personal Communication Services Licenses. Journal of Economics & Management Strategy, 6(3), 549–572. Shoesmith, B., Mahmud, S., & Reza, S. (2013). A political history of television in Bangladesh. In B Shoesmith & J.  W. Genilo (Eds.), Bangladesh’s changing mediascape: From state control to market forces (pp. 237–255). Bristol: Intellect. Tu, Y., & Wong, G.  K. M. (2002). Public Policies and Public Resale Housing Prices in Singapore. International Real Estate Review, 5(1), 115–132. Tullock, G. (1989). The Economics of Special Privilege and Rent Seeking. Boston: Kluwer Academic Publishers.

CHAPTER 7

Property Rights and Price Control

7.1   Introduction The economic rationale of many government regulations can be derived by applying the property rights framework. Price control is one of such legislative actions that can be analyzed from a property rights perspective. Price control imposes restrictions on private contracting by fixing the price of economic resources for which market price is available. If the control price remains below the market clearing rate, the unassigned portion of the economic value (the difference between the market price and the control price) is left to the public domain. People spend resources to capture a portion of that unassigned value. Spending economic resources for already produced goods is equivalent to social waste. In contrast, government may set up prices for some goods or services which are more than the market clearing price. The difference between the market price and the fixed price in this particular regard is equivalent to tax, which increases the marginal cost to the producer, providing an ill incentive to reduce the production, possibly causing deadweight welfare loss. The call for price ceiling or price fixing for consumption goods is generally motivated by a belief that such ceiling makes consumers better off. For instance, it is argued that putting a cap on the price of competitive goods can ensure that the goods remain affordable to most citizens. Evans (1982) relates the logic of price control to inflation and argues that the general price control would be a great idea if inflation imposes social costs

© The Author(s) 2018 M. D. Miah, Y. Suzuki, Power, Property Rights, and Economic Development, https://doi.org/10.1007/978-981-13-2763-6_7

131

132 

M. D. MIAH AND Y. SUZUKI

in the form of more expense in calculating and posting prices, social unrest, and uncertainty about the price level, or redistribution of wealth from the rich to the poor. Historical analysis shows that the price control was effected particularly during the period of economic instability when developing a competitive market price was uncertain (Chen 1999). For instance, during World War II, general price controls worked well in the USA. General price level and the rate of inflation were substantially lower than they would have been in the absence of price controls (Evans 1982; Mills and Rockoff 1987). It is difficult during the war to predict the price movement of a particular commodity and other factors that affect prices. However, evidences are aplenty in the literature showing that peacetime price control was also common in many economies (Cheung 1996; Rockoff 2004). Rent control for apartment is one of the frequently cited examples of price control (Arnott 1995; Autor et al. 2014; Cheung 1979; Olsen 1972). Besides rent control, other economic activities have gone through some phases of price control. For instance, Barzel (1997) reports that the US government initiated a price cap on gasoline during 1971–1974. Nillesen and Pollitt (2007) report that the Netherlands adopted several phases of price control for electricity distribution and transmission. Navissi et  al. (1999) bring evidence of price control on equity markets in New Zealand listed public companies. Price control can also be related to fixing the floor price for certain goods or services. Minimum wage rate is one prominent example of fixing the floor price (Lemos 2009). Although the rationale of minimum wage can be derived from Marxian egalitarian view of wealth distribution (see Elster 1986; Suzuki and Miah 2017), Adam Smith was also vocal in favor of minimum wage (Kaufman 2016). The basic argument in favor of minimum wage is that it attracts a greater number of workforce, which will reduce unemployment and increase the overall production (Giuliano 2013). Similarly, fixing the floor price of some products ensures that producers get sufficient price to continue their productions. Despite some economic rationality in favor of price control, this mechanism has failed, more often than not, to achieve the intended purpose. The primary reason is that price ceiling creates shortages of goods for which price is controlled. Friedman (1977) argues: We economists don’t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a

  PROPERTY RIGHTS AND PRICE CONTROL 

133

law that retailers can’t sell tomatoes for more than two cents per pound. Instantly you’ll have a tomato shortage. It’s the same with oil or gas.

Nillesen and Pollitt (2007) show a huge financial loss resulting from control of tariff on electricity distribution and transmission in the Netherlands. Davis and Kilian (2011) estimate that the allocative cost for the US residential market for natural gas, which was subject to price ceiling during 1954–1989, averaged US$3.6 billion annually. Similarly, rent control for residential apartments has resulted in various misallocation across demographic groups and subgroups (Glaeser and Luttmer 2003), inadequate maintenance due to low economic profits for landlords (Cheung 1979; Gyourko and Linneman 1990), and reduced mobility in the housing market (Clark and Heskin 1982). Navissi et al. (1999) provide evidence which shows that equity values of listed firms in New Zealand were negatively associated with the price control. Moreover, the effects of price control on related markets are also reported in the literature (Gould and Henry 1967). We aim, in this chapter, to provide new evidence on how property rights framework can be applied to examine the efficiency issue of resource distribution through price control. In so doing, we analyze two cases that have been experiencing price control for couple of decades. In its quest to achieve a higher level of social utility, the government of Bangladesh has fixed the fare for taxis and auto-rickshaws in most prominent cities of Bangladesh. Fare is fixed in commensuration with the controlled price of natural gas, which is used as fuel in most vehicles. Natural gas is a state-owned resource, which means that government has good control over its supply and price. As such, the government has fixed both the price of compressed natural gas (CNG) used as fuel and the fare market for most CNG-run vehicles so that a greater utility can be transferred to the ultimate consumers. However, the reality does not meet the expectation. Because the control price is lower than the competitive market price, the demand exceeds the supply. Market reaches equilibrium by adjusting other attributes than the price, particularly by means of rationing by waiting, reducing quality of services where possible, and so on. Since it is impossible to precisely delineate every attribute that affects the fare market, controlling only one attribute (price) does not bring greater utility than the competitive market because economic agents can bargain over other attributes. The second case is related to the price flooring. The government of Bangladesh has introduced the floor price of land for registration purpose. This particular regulation implies that transfer fee (registration fee)

134 

M. D. MIAH AND Y. SUZUKI

of a piece of land is to be determined based on the floor price fixed by the regulators, regardless of the actual sale or transfer price. To implement this regulation, lands in a specific area are classified into several categories. The floor price is then determined by averaging the highest and lowest price for each category of land. If the actual sale (transfer) price of a land is less than the floor price, the registration fee is to be charged based on the regulated minimum price. In case the actual transaction price is more than the floor price, registration fee is charged based on the actual price rather than the floor price. We will analyze this case under the broader property right framework. Property rights theory tells us that such regulation restricts the transfer of property, which is an essential element of property rights. Hence, it attenuates the rights on private property. We present data which show that the number of land registrations has declined significantly due to the implementation of floor pricing. Fiscal revenue has also declined commensurably. In most cases, the regulated price is set so high that it barely resembles the actual market price, which means that the transacting parties should pay higher than the actual amount of registration fee. This scenario has led the land price to decline. The chapter has been structured as follows: Section 7.2 describes the basic mechanism of price control and the resulting public domain issue. Section 7.3 presents an empirical case on price ceiling, whereas Sect. 7.4 analyzes a case related to price flooring. An interim conclusion is offered in Sect. 7.5.

7.2   Price Control and the Issue of Public Domain Regulated price or control price is an alternative to the market or competitive price. As mentioned earlier, price control is effected mostly during the time of instable political or economic circumstances, when the movement of price and the factors affecting the price cannot be predicted with significant accuracy. Also, it has been shown that government initiates price control during normal economic condition to transfer greater benefit to the consumers or transfer of recourses from the rich to the poor. Regulation may be welfare-enhancing of a commodity for which there are very few variables to define—for example, price and quantity. In contrast, a commodity of which there are multiple attributes to define price control ­renders limited support (Raymon 1986). Quality variation or variation in the pricing of different types of products may outweigh the perceived monetary savings from price control. This may eventually lead to a decline in net consumer welfare.

  PROPERTY RIGHTS AND PRICE CONTROL 

135

In general, regulators regulate price considering only certain attributes of the assets that affect the price, leaving numerous attributes undefined. For instance, rent ceiling for an apartment is usually accomplished in monetary terms. If the amount of rent is fixed, which is lower than the market clearing price, owners tend to maximize their benefits in non-monetary terms, including renting the apartment to a tenant with small family size, people of specific race, age, religion, or paintings may not be attractive, and so on. Similarly, Barzel (1997) contends that when the Nixon government imposed restriction on gasoline price in 1971, sellers adjusted various attributes other than the price. For instance, sale of lower-grade gasoline was increased; sellers ceased to render auxiliary services they used to give before the price restriction was effected, and the service hours of refueling stations was reduced. This implies that the attributes of a product or service are more diverse than the regulator can imagine and effectively regulate. The impossibility of effective implementation of price regulation lies in the fact that it is economically infeasible to perfectly delineate every attribute of a property owing to high transaction cost (Coase 1960; Barzel 1997). Barzel (1997) contends that in order for property rights to be perfectly delineated, both its owners and other parties interested in the assets must possess full knowledge of all valuable attributes of the assets. Since it is realistically impossible to possess full knowledge for most of the properties, property rights are not perfectly delineated. Some attributes of property are thus placed in the public domain for which economic agents spend resources (for already produced goods) to capture them, which is merely a social waste. Figure 7.1 depicts the public domain issue. The horizontal axis of Fig.  7.1 represents the demand in quantity, whereas the price is depicted in the vertical axis. SS and DD are the supply and demand curves, respectively. The competitive equilibrium is reported at point e, where quantity demand and supply (Q) intersect each other at a price p. Assume that the government imposes a price restriction. Resultantly, p1 becomes the control price. It is further assumed that price control is effectively implemented. In a competitive market, the supply will be reduced to OQ1 amount at the regulated price (p1), but the demand will be equivalent to OQ2. Thus, there will be a shortage of supply equivalent to Q1Q2. At the new level of supply (OQ1), market price would be equivalent to OP2. Since the price is fixed, sellers are allowed to charge price not more than OP1 for goods or services of which the fair market value is OP2. This means that the difference between the competitive mar-

136 

M. D. MIAH AND Y. SUZUKI

Price

S

D

P2

T

P

e

P1

R S

O

D Q1

Q

Q2

Quantity

Fig. 7.1  Price control and public domain

ket price (OP2) and the control price (OP1) multiplied by quantity supplied (OQ1), the shaded rectangle area representing by P1RTP2, is placed at the public domain. In other sense, given the availability of goods or services in the market at the level of Q1, the consumers would be ready to pay the price equivalent to P2. However, thanks to the price control of creating preferential price, the consumers would be able to buy at the price of P1. The shaded rectangle is the ‘excess’ consumer’s surplus. Because the rights on this value have not been assigned, agents will tend to spend resources to capture benefits from those unassigned portions of properties. The property is already produced, so further spending to capture its benefit leads to rent dissipation. The dissipation of non-exclusive income will occur either through a change in the form of using or producing the good, resulting in a decline in its value, or through a change in contractual behavior, resulting in a rise in the cost of forming and enforcing contracts, or through a combination of the two. Since there is a shortage of commodity supply, markets will try to cope with this shortage by inventing some mechanisms. One popular mechanism frequently observed in such cases is the rationing by waiting (Barzel 1974, 1997). Suppose buyers wait now in the queue to receive the extra unit of goods whose control price is less than the competitive price. They would wait until the marginal benefit they receive is equal to the marginal cost in terms of time spent in the queue. However, the value of time spent is received by no one, and hence, it is a loss to society. This implies that property placed at the public domain is likely to generate inefficiency in resource allocation.

  PROPERTY RIGHTS AND PRICE CONTROL 

137

7.3   Price Ceiling: The Case of CNG-Vehicle Project 7.3.1  The Background of the Case Dhaka, the capital of Bangladesh, is one of the notorious examples of air pollution. The level of pollution is much higher than the World Health Organization’s guidelines for residential areas. A World Bank Study estimates that about 5000 deaths merely in Dhaka city, a million cases of sickness requiring medical treatment, and 850 million cases of minor illness can be avoided annually if air pollution levels in the country’s four principal cities are reduced to match standards in force for developing countries. The report further estimates the economic cost of these avoidable deaths and sickness to be US$200–800 million every year (World Bank 2006). The most serious pollutant of the Dhaka city is identified as respirable and fine particulate matter, PM10—particles with an aerodynamic diameter less than 10 μm—and PM2.5, particles with an aerodynamic diameter less than 2.5 μm. Among the vehicular pollutants that emitted PM10 most was the three-wheeler taxi, of which 90 percent were two-­stroke engines (auto-rickshaw). The number of two-stroke vehicles tripled during the period 1990–1996. Such an increase exacerbated the situation of air ­pollution in Dhaka, turning it into a ‘gas chamber’. Several studies have found that those three-wheelers with two-stroke engines were mostly responsible for high pollution in Bangladesh. The leaded gasoline used in those vehicles was the principal source of lead in the atmosphere. Two-­ stroke engines were estimated to emit about 35 percent of particles and more than half of the hydrocarbons emitted by all vehicles. We can figure out two counterparts in this problem: the polluters and those who are getting affected by the pollution. The nature of the problem suggests that polluters were given the right to pollute the air (as opposed to the citizens to enjoy the fresh air). If citizens value fresh air more than the gain of the polluters, a voluntary exchange may take place between these two interacting parties, in which case the citizen would pay the polluters an agreed-upon price to refrain from polluting. However, such a solution may not be economically feasible because too many transacting parties are involved with this negative externality, leading to a collective action problem. Moreover, there is a severe free-riding problem. Individuals who would defray the cost to clean the air cannot limit the benefits of fresh air to them. Rather, nonpayers can also enjoy it. Or in other words, fresh air is a public good for which individuals cannot be

138 

M. D. MIAH AND Y. SUZUKI

charged in congruence with their consumption level. In this sense, the market for pollution exchange at an individual level ceases to exist. As a result, an alternative, more efficient property rights would not emerge through market mechanism because of higher transaction cost. In such a case, state intervention may be required. To do so, the nature of the problem should be clearly analyzed. Coase (1960: 2) warns: “[W]e are dealing with a problem of a reciprocal nature. To avoid the harm to B would inflict harm on A.  The real question that has to be decided is: should A be allowed to harm B or should B be allowed to harm A? The problem is to avoid the more serious harm.” Demsetz (1964) argues that if exchange cost is positive, then it is necessary to determine whether market or government can take the action into account at the least cost. Non-­existence of market at an individual level does not mean that valueenhancing property rights will not emerge. From this perspective, Demsetz (1964) criticizes the traditional welfare theorem, in that it does not take into account the cost of using the market mechanism relative to the cost of using a political mechanism. The absence of a market or price may be efficient because the cost of organizing a market or organizing the exchange might be too high to make the exchange worthwhile. Our problem, in light of this perspective, implies that government intervention is the feasible alternative. Government simply can acquire the rights prohibiting operation of a certain type of vehicles, which are liable for pollution, with strict enforcement. This alternative would be less costly than private exchange, and also, the free-riding problem can be avoided. In contrast, we like to argue that cost advantage of government mechanism alone does not guarantee that it will initiate the change if political or economic gains cannot be derived from the exchange. 7.3.2  The Emergence of Interest Groups and the Change of Rights We can classify the relevant parties involved with this problem into three broad categories: losers, who are the general people (in the sense that citizens are deprived of the opportunity  to enjoy fresh air); gainers or the polluters; and the government or right enforcement agency. Since free market exchange between losers and gainers is not feasible because of collective action nature of the problem (Olson  1965), government has to undertake the initiative.

  PROPERTY RIGHTS AND PRICE CONTROL 

139

In the context of our analysis, whether government will abrogate the right of polluters and authorize citizens’ right to enjoy fresh air depends on the relative balance of power of parties involved with the problem. On the gaining side, there were certain organized groups such as ‘owners’ association’, ‘drivers’ association’, ‘collective bargaining agents’, and so on. These groups were able to organize themselves and lobby for maintaining the status quo. On the losing side, however, there were no such active groups to protect their interest. Although the voice and protest from some pro-environmental groups should be recognized, their efforts were not pressing enough to initiate a change. Moreover, another critical concern was that if three-wheeler vehicles were banned outright, people would suffer from the lack of sufficient transportation unless suitable alternatives are found at the authority’s disposal. Bangladesh is rich in natural gas. If three-wheelers two-stroke engines can be replaced by vehicles operating using CNG as fuel, pollution could be curbed to a greater extent. Moreover, many developing countries, including Brazil, Chile, China, and even neighboring India and Pakistan, have successfully converted their transportation system to natural gas-run vehicle (NGV) system. These were the examples for Bangladesh to follow. The first pilot conversion plant was set up in 1980 under the funding and initiative of the World Bank. Petrobangla, an autonomous petroleum exploring company under the auspices of the government of Bangladesh, appointed GDC, a US-based consultancy firm, for this project in January 1982. The project was completed successfully in 1986, where 32 various types of vehicles were converted into CNG-run vehicles. The technical and financial feasibility of CNG project enthused to form a CNG company under Petrobangla in 1987, which was later named Rupantarita Prakritik Gas Company Limited (RPGCL). The technical and financial feasibility study found that CNG is significantly cost effective than the diesel fuel. Experiments show that a CNG-run vehicle is 80 percent fuel efficient compared to a traditional diesel-run engine. In this circumstance, the most viable option, both economically and environmentally, was to cease the operation of two-stroke engines and find a replacement with CNG-­ run vehicles. This is related to the change of rights from the emitters to the general citizen. Despite the success of the pilot project, there was no sign of progress for the next two decades. At the same time, an intense demand for prohibition of two-stroke vehicles was demonstrated by various non-­government

140 

M. D. MIAH AND Y. SUZUKI

and environmental groups. But the autocratic government (1981–1990) was minimally sympathetic to people’s demand. Although the reason for inertia of the project was unknown, it was predicted that the organized pressure coming from a large number of people who would be affected by the change of rights (prohibition of two-stroke–based three-wheelers) will be tough for an autocratic government that was already going through an unstable political situation. As a result, the issue was put aside. Democracy was restored after a long period of political turbulence. The government was very cautious about any action that may stir up dissatisfaction against the regime. The ruling party took this matter into consideration and tactically avoided the issue of environmental degradation. During the first tenure of stable democracy, CNG projects did not show any sign of progress. When the BNP handed over power at the end of 1995, there were only five CNG filling stations for fueling only 174 NGVs. Conversely, a tremendous rise of three-wheeler vehicles was noticed during this period, which further worsened the air quality. At that time, NGOs, environmental groups, and other such non-governmental bodies put pressure on the government to pay more attention to the problem. But it was seemingly not strong enough to offset pressures stemming from the organized gainers. Bangladesh is rich in natural gas, but CNG-run vehicles require compatible motor engines. Bangladesh was not cost-efficient in producing motor engine. This means that the ban on two-stroke vehicles requires the import of engines from foreign countries. This opportunity paved the way for the emergence of an interest group that started advocating the change of rights to citizen’s favor. This group’s prime target was to capture the monopoly right to import four-stroke engines from other countries. The Ministry of Communication (MoC) was in charge of transportation affairs. Thus, a strong influential group emerged from the Ministry of Communication and the group put strong pressure on the government to execute necessary procedures for prohibiting two-stroke engines and grant them license to import CNG engines. The group’s primary armament was the mandate from the general stakeholders, who wanted to get rid of excess pollution. After several rounds of inter-ministerial meetings, a parliamentary resolution was issued prohibiting two-stroke engines in 2002. Initially, the responsibility to import CNG engines was given to Bangladesh Road Transport Authority (BRTA), a government wing under the auspices of the Ministry of Communication. However, BRTA’s authority was nullified by the pressure of the minister in charge of MoC and

  PROPERTY RIGHTS AND PRICE CONTROL 

141

authorized a private dealer, Uttara Motors, the monopoly right to import CNG engines from India. The ministry argued that BRTA did not have the financial capability to import a bulk number of CNG engines.1 The ministry, however, failed to provide any justifiable explanation as to why it thought Uttara Motors was the only viable importer. Moreover, there was a deficiency in tender procedure in granting license to Uttara Motors. The issue was subsequently discussed in the Parliamentary Standing Committee (PSC), which blamed the minister in charge of MoC. The committee estimated that an engine was priced almost three times the cost of sales to the dealer.2 The adverse effects of the exorbitant price charged on CNG-run vehicles were serious and its effects penetrated different spheres of the economy at various magnitudes. Because of the prohibition of two-stroke engines, the workforce involved with this and related professions was laid off, which implied a serious pressure on their bread and butter. However, this loss could easily be compensated by creating opportunities for them in the new mode of transport. Since there involved no change in demand for transportation market, it was just a matter of transferring the workforce from one mode of transport to another. But the process of shifting was blocked by creating an artificial barrier, such as monopoly supply of CNG-run vehicles. The monopoly supplier was the price maker in a market where the demand was excessively higher than the supply. In a state of monopoly situation, an engine was priced BDT (Bangladeshi currency) 367,000 to buyers. However, independent estimation shows that the competitive market price of that engine was BDT 167,000.3 This means that the monopoly supply of quantity will be much lower than the free-­ market competition, resulting in welfare loss to the society. The ultimate loss resulting from the monopoly supply to the mass population outweighed the gains from few interest groups. This situation is depicted in Fig. 7.2. The horizontal axis represents the quantity demanded for CNG-run vehicles, while the price is depicted in the vertical axis. DD’ is the demand curve, which is downward sloping. The demand curve for the monopolist’s product reflects the marginal social benefit (MSB) of possible levels of output. Assume that the monopolist’s marginal private costs reflect the value of all inputs used to produce additional output, and therefore, reflect marginal social costs (MSC). The monopoly firm should produce output OQ.  This is the output corresponding to point M, at which MSB  =  MSC.  Because a monopolist’s marginal revenue is less than the

142 

M. D. MIAH AND Y. SUZUKI

Price

D MC

S

P1

M P

N D'=AR MR

O

Q1

Q

Quantity

Fig. 7.2  Welfare loss from monopoly supply of CNG vehicle

price of the product, marginal social cost of production also will be less than the price. Thus, at an output level of OQ1, P1 = MSB>MSC, which means that Pareto efficiency is not attained. Under the competitive market conditions, output level will rise (OQ) until prices fall to a level equal to marginal social cost. The additional net benefits possible from increasing output from OQ1 to OQ units are shown by the triangular area MSN. This represents the benefit forgone due to restricted output, which is equivalent to deadweight welfare loss. Let us focus on another dimension of the problem. We have mentioned that traditional refueling stations that used to refuel diesel engine vehicles were incompatible to refuel CNG-run vehicles. In this case, new refueling stations should be set up to meet the new demand. Government had some lands at its disposal to be distributed for establishing new refueling stations by private initiative. Of course, government also attempted to curtail supply by instituting the licensing system. Another interest group emerged to capture land allocated by the state. The Parliamentary Standing Committee in their investigation found that some state-owned lands were allocated in exchange for personal gains. Moreover, the bureaucratic procedure was so cumbersome that a potential investor would find it extremely difficult to fulfill the required procedure. For example, establishing a CNG filling sta-

  PROPERTY RIGHTS AND PRICE CONTROL 

143

tion required approval from eight government agencies that were highly bureaucratic. Investors without political affiliation found the barrier unbreakable.4 The committee further showed that 170 plots for setting up CNG stations on government lands were allotted in 2003, and until the first quarter of 2007, only 24 of them were developed and converted to refueling stations. Most of the remaining plots were allotted to politically affiliated persons, including more than dozens of former parliament members. One critical negative effect of the lack of sufficient number of refueling stations was that the supplying capacity of gas was limited, which means that demand is greater than supply at a particular point in time. This situation should generally lead the price of gas to rise. However, government controlled the price of CNG. As a consequence, the probability of price rise disappeared. However, the problem lies elsewhere. Price is just one attribute of the broader package that drives the CNG fare market. It was impossible for government to perfectly delineate the bundle. Even if the quality of gas is invariant, other relevant services are not. For instance, quality of other services provided by suppliers to the customers can be reduced to adjust to the increased demand. Moreover, an important shortcoming was that the drivers had to wait a few hours in the queue for their turn to refuel. Taking into account the opportunity cost of time, drivers pay more than they are nominally charged for gas. This can be shown by a schematic presentation in Fig. 7.3. Price of CNG/cubic D meter

P1

Resource left in the public domain

E1

E

P=8.5

C D'

O

Q1

Q

Fig. 7.3  Price control in the natural gas market

Supply of CNG

144 

M. D. MIAH AND Y. SUZUKI

DD’ is the demand curve, which is downward sloping. Supply of gas at a particular point in time is fixed because the number of refueling stations cannot be increased overnight. Let us assume that the current refueling station is working at no idle capacity. Thus, the supply of gas responding to the increase in demand cannot be changed. Supply is determined by the number of available refueling stations. Available statistics suggests that until 2007, there were only 100 refueling stations in Dhaka city. Supply capacity of those 100 refueling stations was far less than the demand. Let us consider Q1 = 100 (in Fig. 7.3). In this circumstance, the equilibrium price is P1 and the quantity supplied is OQ1. Gas is natural resource, which is owned by the state. Thus, it is the state that determines the price. In July 2008, the price of CNG was fixed at BDT 8.5 per cubic meter, which is represented by P in our diagram (7.3). However, at this price the quantity demanded is OQ. Assume that the control price P is perfectly enforced. Then a discrepancy between the quantity demand (Q) and the quantity supplied (Q1), known as shortage, will arise. Since supply is Q1, it is the amount available to consumers. However, at this level of supply, consumers are willing to pay an amount equal to P1. If so, value of the CNG equivalent to (P1-P) is attempted transfer to consumers as surplus. However, an ill incentive to cut the supply may cancel this out. More importantly, ownership on that value is not assigned. In this circumstance, buyers and suppliers will tend to capture a portion of it. They will spend resources for already produced goods, which is a social waste. Because customers can pay BDT 8.50 per cubic meter in monetary terms, they will spend time equivalent to the difference between P1 and P by waiting in line for refueling. Let us approximate that the equilibrium price of CNG is BDT 12.50 per cubic meter, and at a time, they can refuel 30 cubic meters of gas. If so, they pay BDT 255 by monetary unit and BDT 120 by waiting. If opportunity cost to buyer is BDT 40 per hour, then he/she will not wait for refueling more than three hours in a single chance. The amount represented by (P1–P) *Q1 is the total value of time spent. This proposition holds for ordinary product market as well. But the scenario for transportation is different because buyers’ (drivers) cost curve is almost identical. Under this state of condition, they can transfer  this amount even in a competitive market to people who are using this mode of transportation. In this sense, users of this service have to pay the driver more than the fixed fare as compensation for the latter’s time spent in the queue. This means that price control does not yield the desired result

  PROPERTY RIGHTS AND PRICE CONTROL 

145

because government cannot delineate every attribute that affects the price of taxi services. In our example, if government decides the price of taxi services with the assumption that waiting time in the queue is zero or insignificant, obviously price control brings higher level of social inefficiency. We can imagine two crucial effects on users of this service. At the first instance, the number of CNG-run vehicles is curtailed because of monopoly supply, which means that available services are less than the demand. On the other hand, because of the insufficient number of refueling stations, buyers (drivers) had to spend extra hours in the queue, which imposed a cost equal to the opportunity cost of time. We have mentioned that drivers have the opportunity to shift the cost of waiting to users of this service. These two components will constitute a portion of total fare charged for this service. However, government is also concerned about this issue and the price to be charged to a consumer is fixed by the regulation. We can consider a similar schematic presentation in Fig.  7.4 like Fig. 7.3. In July 2008, the fare per kilometer was fixed at BDT 1.05. At this level of price, the amount of service demanded is OQ, but available supply is only OQ1. Considering the supply constraint, if service providers offer exactly the same quality of service as before, consumers are willing to pay a price equivalent to P1. The difference between the equilibrium price Fare/km

Resource left in the public domain P1

E1

E

P=1.05

C D

O

Q1

Fig. 7.4  Price control in the taxi-cab fare market

Q

Amount of service

146 

M. D. MIAH AND Y. SUZUKI

(P1) and the control price (P = 1.05) multiplied by quantity supplied (Q1), the shaded area, is placed at the public domain because the rights of this area have not been assigned. Customers have to pay beyond the control price through various means such as waiting for CNG-run vehicles for a long time. In addition, service providers will try to secure non-pecuniary benefits or reduce the service quality at the given price. Also, such a price will create an ill incentive for producers to restrict the output. While the government assumes no effect on production because of price ceiling, a reduction of output will cause a shortage of supply at regulated price, leading to a deadweight welfare loss. If supply is not cut, surely the suppliers will economize on other attributes, which government cannot precisely restrict. It is a common phenomenon in Dhaka city that one has to wait a long time to avail CNG-run taxi service. A regulation has enacted promulgating that taxi or auto rickshaw drivers are bound to commute passengers to any distance or place in metropolitan area. But it is only on paper; in reality, it is enforced at no level. It is taken for granted that the meter price does not work. Price is stipulated for a certain distance through the market bargaining process. Or, if a particular driver agrees to set the meter price for a certain distance, passengers are asked to add a certain amount above the meter price. Moreover, it is the drivers’ discretion to choose the distance as well as routes they are willing to carry passengers. The market for taxi service ultimately depends on the market mechanism. Thus, the price control that the government has initiated to curb the price has completely failed to achieve the intended purpose. This is because the amount of fare that is fixed by the government is decided based on the fair price of CNG, motor engines, and a standard time spent for refueling. In reality, we have seen that CNG motor engine costs almost three times its standard price and drivers have to wait hours in the queue for refueling gas. The additional cost of time spent in the queue is shifted to the ultimate users of taxi-cab services.

7.4   Price Flooring: The Case of Land Transfer Fee Like fixing the ceiling or cap on the value of certain assets discussed earlier, regulators may implement the floor price on something that is assumed to be socially beneficial. For instance, the minimum wage rate is considered to foster greater social justice through redistribution of resources. However, such regulations often yield undesirable economic ­consequences,

  PROPERTY RIGHTS AND PRICE CONTROL 

147

which the regulators may overlook. For instance, if minimum wage is fixed above the market clearing rate, the labor market would experience a surplus of labor supply. A portion of the total employable labor will remain unemployed. In contrast, if the wage rate is determined by market forces (demand and supply), some workers, whose return from self-employment is less than the fixed minimum wage but more than the market equilibrium rate, will withdraw them from the labor market and choose instead to work for themselves. Similarly, entrepreneurs would be willing to employ more labor than before because the marginal cost of an additional labor is lower than the minimum wage rate. This means that regulatory intervention on the market should take the welfare loss caused by the regulation (such as deadweight welfare loss) and the benefits derived from the regulations. If benefits outweigh the cost, regulations mean to be welfare-enhancing and vice versa. Whatever the case that a certain regulation may increase or decrease the welfare, restrictions are considered attenuation of private property. It was argued earlier that property rights entail owners the right to use the asset, transfer the asset through lease, sale, or rental to those who value it most, and change the substance of the property if he wishes as long as doing so does not affect others’ legitimate rights on property. Flooring and ceiling are kind of restrictions that attenuate private property. For instance, if a ceiling on land price is in force, owner of the land cannot transfer it for a price higher than the ceiling price stipulated by the government. Furubotn and Pejovich (1972: 1140) argue, “[T]he attenuation of private property rights in an asset, through the imposition of restrictive measures, affects the owner’s expectations about the uses to which he can put the asset, the value of the asset to the owner and to others, and consequently, the terms of trade.” The government of Bangladesh has fixed the floor rate of land for determining the land transfer fee. For instance, the price of land in each area is determined by government agencies, which may be more or less than the actual market value. Based on this determined value, transfer fee is assessed, charging a fixed percentage on it. This system of charging transfer fee has created serious repercussions on land market, particularly in rural area where the agency-determined floor price is much higher than the actual market value of land. Transfer fee is a component of transaction cost, which seriously deters the proper function of a market. In addition, charging a fixed percentage as transfer fee on the floor price which is higher than the real market value

148 

M. D. MIAH AND Y. SUZUKI

puts an additional burden on the seller or buyer of land. Literature shows that transfer fee significantly reduces the market transactions. Dachis et al. (2012) show that 1.1 percent tax on land transfer market in Toronto caused a 15 percent decline in real estate sales. The study further shows that a decline in housing prices caused by the transfer was almost equivalent to the tax. This implies that the said regulation has simply transferred the wealth from citizen to government. Similarly, Benjamin et al. (1993) find that 3.5 percent ad valorem tax imposed on Philadelphia is associated with the decline in property value compared to the non-taxed neighboring municipalities. Kopczuk and Munroe (2015) show a peculiar trend in the land market in New York City, where an additional 1 percent tax is imposed on properties which are sold for more than a million dollars. The authors observe that consumers respond to this regulation by engineering a transaction in which the sale price is shown slightly below the million-dollar mark leading to the higher frequency of sales just under the million-dollar mark. Evidence is also pronounced in the literature which shows that a decline in the transfer fee has been accompanied by a rise in the sale of land. Davidoff and Leigh (2013) examine the impact of stamp duty (transfer tax) on the UK land market and find that an increase in the tax was accompanied by lower turnover and a decline in housing transactions. Subsequently, the government introduced a stamp duty holiday in 2008–2009, which resulted in an 8 percent increase in housing sales. Needless to say, transaction cost involved with land transfer in Bangladesh is exorbitant. A World Bank (2000) study shows that small farms in Bangladesh are more productive than their large counterparts, which the study attributes to the comparative advantage of small farms over large farms in monitoring labor. Thus, a land is worth more to a small farmer than it is to a large farmer. This circumstance will ultimately facilitate the transfer of land from large to small farms through market transaction. However, the trend of land concentration does not show any such tendency (Khan 2004). The World Bank study explains this situation by arguing that property rights in land are not well defined, leading to large transaction costs in making effective transfers. This prevents the sale of land from large farms to small farms. But if transaction costs can be minimized through institutional reforms, the desired transfer of land would be possible, which will facilitate increased productivity. In this circumstance, fixing the floor price of land to charge transfer fee is obviously against this reform prescription.

  PROPERTY RIGHTS AND PRICE CONTROL 

149

Two separate but interrelated factors motivated government to enact such a rule. Before fixing the floor price of land, the registration fee was determined by charging a fixed percentage on the sale value of land agreed by the buyers and sellers. It was a common practice that the price disclosed for registration purpose was much lower than the real value (sale/transfer) of land, which deprived government from collecting a significant amount of tax from land transfer. On the other hand, the undisclosed amount of the land value turned into ‘black money’. Because most of the income of rural population is earned from agriculture, which remains unaccounted for tax purpose, the seller of the land simply agrees on buyers’ request to under invoice the land price for registration purpose since it does not affect the seller’s well-being. To avoid this tendency of accumulating black money in the economy and to increase the government fiscal income from this sector, the government decided to fix the floor price of land in commensuration with current market price. However, there is no objection to register a land at the actual price, which is more than the floor, although it does not happen quite often. To determine the floor price, an area is specified according to Mouza, an administrative area consisting of several villages (a single village can also be a Mouza, depending on its size) mainly specified for the purpose of fiscal revenue collection. Lands in a certain Mouza are classified into some groups, including plain land (Nal), ditch, residential area, swamp, and so on. For each category of land, the floor price is determined by a four-­ member committee composed of the district registrar of land, subregistrars of two different Upazilas, including the one for which the price is to be determined, and the Upazila vice chairman. The committee then averages the highest and the lowest price recorded in a specific year for each category of land, and then, sets the average as the floor for registration purpose. The price list is then sent to Upazila Assistant Commissioner Land, concerned District Commissioner, District Judge, and Inspector General of the directorate of the registrar of the Ministry of Law, where the list is checked and approved. The approved list is then announced for the public. There is a provision that if the floor rate is grossly inconsistent with the current market price, any interested party can apply for revision. However, the process is very complex and time consuming. This regulation defies the standard property rights framework. For instance, there are lot of important variations between two pieces of land belonging to a specific category. A piece of plain land (Nal) near a highway is worth more than the value of a plain land located far from the highway.

150 

M. D. MIAH AND Y. SUZUKI

Y Amount of Transfer fee

Transfer fee based K on market price E

F

L

Equivalent to tax

Transfer fee based on floor price

M O

Q

Land

X

Fig. 7.5  The effect of floor pricing on land transfer fee

If registration fee is determined based on the floor price, the latter piece of land has to pay the same fee as that of the former despite their market value being substantially different. Adding registration fee to the market value of land would increase the cost to buyer of land located far from the highway. This is equivalent to tax. Society loses from deadweight welfare loss due to less number of land transactions when tax is imposed (see Fig. 7.5). In Fig. 7.5, the X axis shows the price of land, whereas the Y axis depicts the amount of transfer fee to be paid when a land is transferred. The line MK indicates the amount of transfer fee if assessment is based on market price, whereas FL indicates the amount of transfer fee if assessment is based on floor price, which is fixed by the regulator. The point Q shows the land price at which the transfer fee is equal between the market price and the floor price. Any land which is priced in the market less than Q pays an extra amount as transfer fee. The shaded area indicated by the triangle EFM is actually charged extra because of fixing the floor and is equivalent to tax. This extra charge will increase the cost to the buyers, who will negotiate with the seller to transfer a portion of it. No matter if the seller or the buyer ultimately absorbs the burden, transactions will be less for lands which are valued less than Q if floor price is applied rather than the market price. It is reported that the process of fixing the market price of land for the purpose of registration was started in 2002 on an experimental basis

  PROPERTY RIGHTS AND PRICE CONTROL 

151

(though the system was in effect in some areas before 2002). In 2004, assessing the registration fee based on the market value as opposed to the value agreed upon by the buyers and sellers was mandatory for the whole country. However, it was not until 2010 when the necessary rules were specified for determining Mouza-wise floor price. Since then, the floor price has been applied to assess the transfer fee. Applicable transfer fee at present ranges between 10 and 14 percent (in some areas it can rise up to 19%) depending on the area where the land is located. This fee comprises stamp fee (3–4%), tax deducted at source (3–4%), registration fee (2%), local tax (2%), and others (1–2%). This transfer fee itself is high compared to that in other South Asian countries. In addition, fixing the floor price more than the market price adds an extra burden to the buyer of the property, which has a negative impact on the sale of property, as shown in Table 7.1. It seems that the government was somewhat cautious at the beginning and followed conservative and practical approaches in setting the floor price. Gradually, it has deviated from the reality to a greater extent. Table 7.1 shows that until the fiscal year 2011–2012 (July to June), the flow of land registration was normal. There was no apparent effect of the price flooring on the land transactions. However, it did not take long to feel the effect. For instance, starting from the fiscal year 2012–2013, land transfers (deeds) did not increase expectedly. At worse, land transactions significantly declined in the fiscal years 2014–2015 and 2015–2016.

Table 7.1  Number of transfer deeds completed and amount of revenue collection Fiscal year

Total no. of Change (in %) deeds completed

Revenue collected (in million BDT)

Change (in %)

2010–2011 2011–2012 2012–2013 2013–2014 2014–2015 2015–2016 2016–2017

32,81,989 43,53,246 44,30,000 44,65,135 34,19,542 29,49,936 NA

32,430 52,750 NA 77,503 107,531 109,269 117,000

62.66 46.95 (in 2 years) 38.74 1.62 7.07

32.64 1.76 0.79 −23.42 −13.73

Source: Compiled from daily newspaper NA indicates not available

152 

M. D. MIAH AND Y. SUZUKI

Table 7.2  Revenue collection from land transfer before implementation of floor price Fiscal year

Revenue (in billion BDT)

Change (in %)

1999–2000 2000–2001 2001–2002 2002–2003 2003–2004 2004–2005 2005–2006 2006–2007 2007–2008 2008–2009 2009–2010

10.99 11.90 10.78 10.52 14.61 17.82 14.99 16.79 21.89 26.25 27.06 Average

– 8.28 −9.41 −2.41 38.88 21.97 −15.88 12.01 30.38 19.92 3.09 10.68

Source: Compiled from daily newspaper

Decline in the number of deals does not cause much worry if the size (money value of transaction) is large. Deals large in size but few in numbers can increase fiscal revenue expectedly. Thus, the number of transactions alone does not indicate that there is a negative effect of price flooring on land transfer. The statistics about revenue collection from these ­transactions reflects this issue. The data, however, does not illustrate that revenue has increased commensurably with the price flooring. For instance, revenue collection increased substantially in the first few years of implementing the floor price. The growth, however, declined remarkably in the last few years despite the growth remaining positive. This positive growth does not tell us the full story. Table 7.2 shows the revenue collection and annual percentage change for 10 years before the price floor was fully implemented. The data shows that the growth of revenue collection averaged more than 10 percent, which we can assume as normal growth. If we deduct this normal growth from the actual growth rate achieved during the period shown in Table 7.1, to check if the effect of price floor was substantial, the actual growth rate appears to be negative for the last two years and moderate in the preceding three years despite the floor price having been revised and increased manifold during the same period. These statistics prove that the decline in land registration caused by the price flooring has offset the positive impact of fee collection.

  PROPERTY RIGHTS AND PRICE CONTROL 

Box 7.1 A Field Visit Experience

153

A buyer agreed to buy a piece of land equivalent to 40 decimals (0.4 acre) located comparatively in a remote area in 2012. The land was categorized as plain land (Nal) which was ready for cultivation. Negotiation between the buyer and seller led an agreed price equal to BDT 40,000 per decimal or BDT 1.60 million in total. However, the floor price for registration of this land was so high that prevented the buyer from registering the land instantly. According to the buyer’s statement, the floor was never less than BDT 100,000 per decimal for this category of land. The applicable charge is about 12 percent. In terms of the floor price, the land price amounts to BDT 4 million and 12 percent on this amount yields BDT 480,000. However, if the market price is considered, registration fee amounts to BDT 192,000. The regulated registration fee, which is 30 percent of the market value of the land, and the difference thereof (BDT 288,000 or 18 percent more than market value), according to the buyer, are significant, which he finds morally and financially upsetting. The buyer was eagerly waiting for either the floor price or the registration fee (rate) to decline. As such, he requested the seller to wait for some time to receive his due in full and finish the transfer. However, the seller was unwilling to wait for an uncertain period of time after selling his land. This has facilitated serious arguments between them. At one point, the seller warned to resell the land and confiscate the advance already made if the buyer does not clear the unpaid amount within a stipulated period. The buyer finally paid almost the full amount to the seller although the transfer until the beginning of 2018 was not officially completed. The land is already in the buyer’s possession, but he knows that possession does not guarantee the title of the land until the registration process is officially completed. While the buyer is well aware about the uncertainty he is accepting by paying the full amount and not registering the land, he rather counts on the seller’s morality and ethics in this regard. He also knows that there was no instance of lowering the floor price in the past and the probability of this to happen in the future is almost zero. Thus, the buyer is preparing himself to accept the harsh reality and expects to finish the legal transfer of the title in the near future.

154 

M. D. MIAH AND Y. SUZUKI

The experience cited above is not a stand-alone case. It is claimed by the REHAB (Real Estate and Housing Association of Bangladesh) president that about 50–60 percent of residential flats sold remain unregistered due to high registration fee.1 Whenever there is a scope, buyers and sellers often recourse to some unethical means, which leads to corruption and bribery. The Comptroller and Auditor General (CAG) office examined 371 land transfer deeds randomly drawn from 20 subregistry offices. The report showed that 78 percent of these deeds were involved with various levels of irregularities.2 Since it is impossible to under-invoice the land price due to the existence of floor price, buyers mostly change the category of land from the expensive category to comparatively cheaper category, for example. The concerned offices fail to spot such irregularities due to either asymmetry of information or their involvement with the irregularities. 1 Regulated price of land is going to be reassessed (in Bengali), Kaler Kontho, May 29, 2017 2 Seventy-eight percent land registration deeds are found with irregularities (in Bengali), Samakal, January 14, 2016 Table 7.3 shows the floor price of plain land of Cox’s Bazar Municipality (randomly selected). It is to be noted that floor price varies based on the category and location of land. Thus, an aggregate price cannot be derived. The data shows that price of that particular class of land on that municipality increased by 460 percent in the last five years, which does not conform to the prevailing market price. The price set as floor in 2014 was already so high compared to the market price that it rendered further revision in 2015 and 2016 unnecessary. This evidence is not an exception but rather a common phenomenon. In many places, land registration was almost close to none due to the abnormal level of floor pricing.5 The above analysis proves that the floor rate fixed for registration purpose was much higher than the actual market price of land. This extra burden has caused substantial reduction in land transfer, which seriously undermines the spirit of property rights because it restricts the market from functioning properly. In other words, property cannot be transferred to those who value them most due to high transaction cost, which, in turn, leads to the inefficient allocation of resources. However, such inefficient allocation cannot be attributed to some spontaneous market forces; but rather, it is caused by policy error of legislators.

  PROPERTY RIGHTS AND PRICE CONTROL 

155

Table 7.3  Rate of plain land (Nal) in Cox’s Bazar Municipality Year

Floor rate

Change (in %)

2009 2010 2011 2012 2013 2014 2015 2016

184,642 431,605 508,264 521,426 911,278 1,035,191 Not revised Not revised

133.75 17.76 2.59 74.77 13.60 – –

Source: Compiled from daily newspaper

As mentioned earlier, one of the objectives of price flooring was to increase the fiscal revenue from land transfer. This objective has not been achieved in reality. A nominal revenue increase from this sector can be attributed to the transfer of high-value lands whose floor price is less than or equivalent to the actual market price. This creates a dilemma. Market value of these high-value lands is more than the floor price, but the price disclosed for registration purpose, in most cases, is equivalent to the floor price (under invoicing). The undisclosed amount turns into ‘black money’. Thus, the price flooring was justified on the excuse that it will reduce the amount of black money in the economy. While this regulation remains in force, the government allowed many occasions to whiten the black money by paying a certain percentage of it as tax. These opportunities to whiten the black money provide buyers and sellers a moral ground not to disclose more than the floor price for registration. In this sense, these two regulations simultaneously are in conflict with each other. Second, floor pricing acts as an instinct to increase the rich-poor divide as well as the rural-urban disparity because land transfers are highly suppressed in the rural and comparatively remote areas where the floor price is seemingly higher than the market price. In contrast, the floor price in the urban and comparatively richer areas is lower than the real market price. Also, this regulation is contrary to the World Bank’s prescriptions, which recommend institutional reform to reduce transaction cost so that land transfers from less productive to more productive firms take place. Based on the above discussion, it can be argued that the attenuation of property rights through initiating price flooring in land registration is welfare-reducing.

156 

M. D. MIAH AND Y. SUZUKI

7.5   Conclusion Market or price mechanism is believed to be a superior institution for efficient allocation of scarce resources. In a free market exchange, price is determined by the mutual interaction between the buyers and sellers. Such a distribution is presumed to reflect the willingness and ability to pay of competing individuals. In this sense, price mechanism works as a guidepost for directing resource allocation where it is valued the most. Since buyers’ ability to pay plays a decisive role in determining the resource owner, a certain segment of the total population may not have sufficient economic power to access certain essential products or services, drugs, for instance. From the socioeconomic concept of redistributive justice, price is sometimes controlled. However, price control in most instances has failed to achieve the intended objectives because the regulators can control only a limited ­number of attributes that affect the price of a product or service, leaving numerous other attributes undefined or unassigned. If a ceiling is set below the market clearing price, the sellers may intend to economize on other attributes which are not defined by the regulators. Likewise, buyers know that the intrinsic value of the product or service is more than the controlled price. Thus, they are tempted to spend resources to capture the unassigned value of the asset (above the controlled price). Spending resources for an already produced goods is merely a social waste. From this analytical framework of property rights, we have illustrated the case of CNG and its associated fare markets in Bangladesh. The demand for services of CNG-run vehicles is huge. However, the supply side has been restricted by the monopoly rights of importing CNG engines as well as limiting the supply of CNG. At this circumstance, the government has fixed the price of CNG as well as the fare of CNG-run vehicles. The control price seems to be less than the market clearing price, which is reflected on the persistent high demand of this services. We have shown that the CNG market is cleared by the law of ‘rationing by waiting’. One has to wait long time to refuel the vehicle. The opportunity cost of this waiting is not considered in setting the standard fare. Thus, the suppliers attempt to shift this burden to the consumers. In so doing, they add a fixed amount above the standard meter price. Since meter price is below the market clearing rate, buyers are willing to pay the extra to avail the services. Also, the service providers practically retain the right to choose the distance and routes in commuting passengers. Through various other

  PROPERTY RIGHTS AND PRICE CONTROL 

157

such mechanisms, agents attempt to reach an equilibrium, which is not much different from the market equilibrium. Thus, the actual result of allocative efficiency differs from what the nominal control seems to specify. The second case also reveals that price flooring results in a number of malicious effects on the economy and impairs wealth creation. Although the regulators wanted to increase fiscal revenue by setting the floor price above the actual market value, the extra burden of registration fee has restricted the natural functioning of land market. Land transfer has declined as a result, leading to a decline in fiscal revenue. It would thus be appropriate to recommend that let prices play their proper role in the economy and devise other mechanisms to achieve other socioeconomic objectives, including redistribution of resources.

Notes 1. The CNG scooter issue, The Weekly Holiday, January 04, 2009. 2. An investigation by Transparency International Bangladesh (TIB) reported that the communication sector was the most corrupt among other wings of the BNP’s second term (2001–2006). The TIB further mentioned that the country had incurred a financial loss of about BDT 4.15 billion in the year 2004 due to corruption (The Daily Star, October 20, 2005). 3. “Huda draws JS body flak over scam charge” The Daily Star, Vol. 4 no.221 January 8, 2004. 4. Lack of CNG Refuelling Stations: Red tape shoos away prospective investors, The Daily Star, June 22, 2007. 5. Buyer, seller, and land stamp vendors are in trouble: price of land increased by 18 times in two years [in Bengali], Daily Prothom Alo, January 01, 2011.

References Arnott, R. (1995). Time for Revisionism on Rent Control? Journal of Economic Perspectives, 9(1), 99–120. Autor, D. H., Palmer, C. J., & athak, P. A. P. (2014). Housing Market Spillovers: Evidence from the End of Rent Control in Cambridge, Massachusetts. Journal of Political Economy, 122(3), 661–714. Barzel, Y. (1974). A Theory of Rationing by Waiting. The Journal of Law and Economics, 17(1), 73–95. Barzel, Y. (1997). Economic Analysis of Property Rights. Cambridge: Cambridge University Press.

158 

M. D. MIAH AND Y. SUZUKI

Benjamin, J. D., Coulson, N. E., & Yang, S. X. (1993). Real Estate Transfer Taxes and Property Values: The Philadelphia Story. The Journal of Real Estate Finance and Economics, 7(2), 151–157. Chen, P. (1999). Setting Price Controls While Facing Variable Or Uncertain Market Conditions. International Economic Review, 40(3), 617–634. Cheung, S. N. S. (1979). Rent Control and Housing Reconstruction: The Postwar Experience of Prewar Premises in Hong Kong. The Journal of Law & Economics, 22(1), 27–53. Cheung, S.  N. S. (1996). Price Controls, Property Rights, and Institutional Change. In L.  J. Alston, T.  Eggertsson, & D.  C. North (Eds.), Empirical Studies in Institutional Change (pp.  219–223). Cambridge: Cambridge University Press. Clark, W. A. V., & Heskin, A. D. (1982). The Impact of Rent Control on Tenure Discounts and Residential Mobility. Land Economics, 58(1), 109–117. Coase, R.  H. (1960). The Problem of Social Cost. The Journal of Law & Economics, 3, 1–44. Dachis, B., Duranton, G., & Turner, M. A. (2012). The Effects of Land Transfer Taxes on Real Estate Markets: Evidence from a Natural Experiment in Toronto. Journal of Economic Geography, 12(2), 327–354 Davidoff, I., & Leigh, A. (2013). How Do Stamp Duties Affect the Housing Market? Economic Record, 89(286), 396–410. Davis, L.  W., & Kilian, L. (2011). The Allocative Cost of Price Ceilings in the U.S. Residential Market for Natural Gas. Journal of Political Economy, 119(2), 212–241. Demsetz, H. (1964). The Exchange and Enforcement of Property Rights. The Journal of Law and Economics, 7, 11–26. Elster, J. (1986). An Introduction to Karl Marx. New York: Cambridge University Press. Evans, P. (1982). The Effects of General Price Controls in the United States during World War II. Journal of Political Economy, 90(5), 944–966. Friedman, M. (1977, February 13). Controls blamed for U.S. Energy Woes. Los Angeles Times. Furubotn, E. G., & Pejovich, S. (1972). Property Rights and Economic Theory: A Survey of Recent Literature. Journal of Economic Literature, 10(4), 1137–1162. Giuliano, L. (2013). Minimum Wage Effects on Employment, Substitution, and the Teenage Labor Supply: Evidence from Personnel Data. Journal of Labor Economics, 31(1), 155–194. Glaeser, E. L., & Luttmer, E. F. P. (2003). The Misallocation of Housing Under Rent Control. American Economic Review, 93(4), 1027–1046. Gould, J. R., & Henry, S. G. B. (1967). The Effects of Price Control on a Related Market. Economica, 34(133), 42–49.

  PROPERTY RIGHTS AND PRICE CONTROL 

159

Gyourko, J., & Linneman, P. (1990). Rent Controls and Rental Housing Quality: A Note on the Effects of New  York City’s Old Controls. Journal of Urban Economics, 27(3), 398–409. Kaufman, B.  E. (2016). Adam Smith’s Economics and the Modern Minimum Wage Debate: The Large Distance Separating Kirkcaldy from Chicago. Journal of Labor Research, 37(1), 29–52. Khan, M. H. (2004). Power, Property Rights and the Issue of Land Reform: A General Case Illustrated with Reference to Bangladesh. Journal of Agrarian Change, 4(1–2), 73–106. Kopczuk, W., & Munroe, D. (2015). Mansion Tax: The Effect of Transfer Taxes on the Residential Real Estate Market. American Economic Journal: Economic Policy, 7(2), 214–257. Lemos, S. (2009). Minimum Wage Effects in a Developing Country. Labour Economics, 16(2), 224–237. Mills, G., & Rockoff, H. (1987). Compliance with Price Controls in the United States and the United Kingdom During World War II. The Journal of Economic History, 47(1), 197–213. Navissi, F., Bowman, R.  G., & Emanuel, D.  M. (1999). The Effect of Price Control Regulations on Firms’ Equity Values. Journal of Economics and Business, 51(1), 33–47. Nillesen, P. H. L., & Pollitt, M. G. (2007). The 2001-3 Electricity Distribution Price Control Review in the Netherlands: Regulatory Process and Consumer Welfare. Journal of Regulatory Economics, 31(3), 261–287. Olsen, E. O. (1972). An Econometric Analysis of Rent Control. Journal of Political Economy, 80(6), 1081–1100. Olson, M. (1965). The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge, Massachusetts: Harvard University Press. Raymon, N. (1986). Price Ceilings, Product Quality and Consumer Welfare. Journal of Economics, 46(4), 369–395. Rockoff, H. (2004). Drastic Measures: A History of Wage and Price Controls in the United States. Cambridge: Cambridge University Press. Suzuki, Y., & Miah, M.  D. (2017).China’s “New Normal”: An Interpretation from Institutional and Marxian Views. Journal of Comparative Asian Development, 16(1), 21–46. World Bank. (2000). Bangladesh: Study of Land Issues. Dhaka: World Bank Dhaka Office. World Bank. (2006). Technical Annex: Health Impacts of Air and Water Pollution in Bangladesh. Washington: The World Bank. Retrieved from http://documents.worldbank.org/curated/en/761171468002666985/TechnicalAnnex-Health-impactsof-air-and-water-pollution-in-Bangladesh (on January 25, 2009).

CHAPTER 8

Toward an Appropriate Structure of Right

8.1   Introduction An efficient structure of property rights aligns private and social costs by charging harmful activities and rewarding socially optimal behaviors. Once this cause-effect relationship is linked, society approaches the Pareto optimality. In contrast, an inefficient structure of property rights motivates actors toward exerting below-optimum level of efforts. Instead, they search for ways in which the fruits of other’s efforts can be harvested. Society, on the aggregate, suffers as a result. Thus, delineating an efficient structure of property rights must be the prerequisite for economic performance of a country. However, it is not always easy to get the property rights right. It is to be emphasized that there are some market forces that prohibit the evolution of the most efficient structure of rights. At the same time, distribution and enforcement of rights require some sort of enforcing agents with strong command on the distribution of resources. In addition, these agents may have their own utility function. If the results of the efficient structure of rights do not conform to the given utility of the enforcing authority or if the enforcing agents lack enough commanding ability to direct the resources in a determined way, efficient structures of property rights may not emerge. This implies that the search for an appropriate structure of rights should precede an analysis of sociopolitical institutions of a particular country because there is no one-size-fits-all prescription in

© The Author(s) 2018 M. D. Miah, Y. Suzuki, Power, Property Rights, and Economic Development, https://doi.org/10.1007/978-981-13-2763-6_8

161

162 

M. D. MIAH AND Y. SUZUKI

this particular regard. This chapter aims to achieve this objective in the context of Bangladesh. In so doing, the prevailing structure of property rights reflected in various cases analyzed in previous chapters is summarized. This is expected to provide an idea as to what should be done to ameliorate the current inefficient structure of rights. Finally, some institutional changes that are expected to bring better social outcomes are recommended.

8.2   Summary of the Prevailing Structure of Property Rights Table 8.1 summarizes the nature, causes, and consequences of the prevailing property rights in Bangladesh. It has been observed that non-market allocation has completely failed to justify the relevance of this institution to the overall social welfare of the country. This failure, however, does not nullify the redistributive justice embedded with the spirit of non-price allocation of resources; but rather, the complementary institutions are designed to cater to the needs of special interest groups. As a result, this sort of institutions has turned welfare-reducing instead of welfare-enhancing. The same applies to the cases of price control. These cases offer many important insights related to property right analysis. First, they show that price control fails to serve the intended purpose if major attributes that significantly affect the price of a property cannot be perfectly delineated. Since the possibility of doing so is nearly impossible, this action merely results in inefficiency. Second, the transition from pollutant (two-stroke engines) to clean technologies (four-stroke CNG-run vehicles) was praiseworthy. It was infeasible for individuals to solve the emission problem because of high transaction cost and free-riding problems. Few interest groups have emerged to facilitate the change. As a result, institutional transformation has taken place. This phenomenon supports the interest group theory of property rights. However, the transition has resulted in suboptimal social welfare because monopoly rights to import CNG engines and establishing refueling stations created a social waste in the guise of deadweight welfare loss. This situation has been exacerbated further by executing a cap on the price of CNG as well as the fare market of CNG-run vehicles. Obviously, a cap on price which is less than the market clearing price creates a shortage in supply. Suppliers thus attempt to adjust other attributes than the price in offering this service. Buyers are willing to bargain over these undefined attributes because the monetary price they offer for acquiring the service is less than the actual price. Mutual bargain

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

163

may lead to an equilibrium close to that of the market. Hence, the effort put for instituting and enforcing price control turns into a pure social waste. This phenomenon further entails inaccurate modeling of economic policies by regulators and bureaucrats. The economic consequences of inefficient structure of rights are serious and often lead to institutional failure. Institutional failure refers to a set of existing institutions that can be reorganized for potential improvement of performance (Khan 1995: 72). Institutional failure can roughly be divided into two forms—structural failure and transition failure. Structural failure refers to a comparison of the outcomes generated by the existing set of institutions with the outcome generated by a hypothetical alternative structure of constraints. According to Khan (1995: 73), structural failure occurs “if a particular formal institutional structure results in lower net benefits for society compared to an alternative structure”. In this sense, the first two cases (Table 8.1) resemble structural failure. Table 8.1  Nature and causes of prevailing property rights Type of right allocation Initial allocation (building permit)

Critical factors driving and sustaining such allocation

Political influence to preserve vested interests Errors of omissions by the judiciary Improper and tenuous regulatory oversight Changes in the existing Typical patron–client politics rights (land allocation Lack of credible commitment through lottery system) by the suppliers of rights Fragile administration and bureaucratic control Creation of new rights Cronyism (television broadcasting Errors of omissions and frequency) commissions by the bureaucrats Political intervention over the judicial system Attenuation of rights (price Failure of collective action control) Inaccurate economic modeling by the bureaucrats Errors of omissions by the regulatory authority

Consequence Falling into ‘structural failure’

Leading ‘transition failure’ of interlocking inefficient structure

164 

M. D. MIAH AND Y. SUZUKI

In the Rangs Bhaban case, initial allocation of rights by Rajuk was wrong. Second, the High Court committed an error of omissions or commissions in rendering the decision that the demolishing order of Rangs by Rajuk was unlawful. Third, the owner had been able to continuously circumvent the existing legal procedures by persuading politicians, regardless of their political identity, to maintain his illegal right. The success achieved thereby influenced others to follow the same tradition, which ultimately led to the rise of huge social cost. A timely and proper intervention by the state could have avoided such cost. Similarly, land allotment through lottery system has created huge rent, which encourages intense competition for rent seeking. Moreover, the allocated right was not guaranteed because changes in political power were associated with the alteration of allocated rights. Thus, if such non-­ market allocation takes place maintaining proper legitimate criteria and the commitment on rights is credible, society can be better off because rent-seeking costs such as lobbying, corruption can be avoided or would be lower. Since interest groups possess influential bargaining power in resource distribution, a shift to alternative, more efficient institution is resisted, leading to an eventual structural failure. In some cases, institutional changes were observed. However, the trajectory of change was predefined in such a way that benefits were derived by certain privileged groups. This is what we call transition failure. Transition failure occurs when the process for changing the structure of institutions attains a lower set of net benefits for society compared to an alternative. In the case of broadcasting frequency, creation of new right was associated with higher social benefits because it altered the monopoly rights over broadcasting. But the process of allocating rights attains a lower benefit because the death of ETV was associated with the decline of social utility. Thus, if rights were allocated maintaining proper procedures and with defined accountability of the administration, this transition ­failure could have been avoided. Moreover, abrogation of an existing right and creation of a new right were followed by the change of political power, which proves that a stable system of administration and judiciary is absent. The same transition failure is evident in the case of price control. Rearrangement of rights was socially desirable because government initiated a change to overcome the collective action failure. However, the change was not initiated in the right direction, but rather, monopoly rent was created, which, in turn, produced socially undesirable outcome through a chain reaction of CNG-engine market, fuel market, and, ulti-

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

165

mately, fare market. On the other hand, implementation of floor price system for assessing registration fee on land transfer has actually resulted in fewer land transactions and decline in fiscal revenue, which are against the objectives of the regulation. This provides us with the evidence that structural failure is a common institutional characteristic in Bangladesh which results in unproductive rent seeking. Emergence of new rights or change in the existing rights is facilitated by certain interest groups who continuously lobby to turn the allocated right to their favor. This has two major economic consequences. First, rent-seeking input or cost is high. Second, rent-seeking outcome is not the one which is the best possible alternative. Combined effect of both is, thus, socially deleterious. Table 8.2 provides a summary of rent-seeking cost and outcome. Table 8.2  Consequence of inefficient property rights on rent Type of right allocation

Rent-seeking cost

Initial allocation

High (rent-seeking contest prevailed, limitedly though)

Changes in the existing rights

Creation of new rights

Attenuation of rights

Rent-seeking outcome

Inefficient (improper construction permits created wrong incentive and generated social waste. Bounded rationality and uncertainty may hinder the optimal allocation) High (excessive Inefficient (patron-client relation competition for rent dictated the distribution. Reversal seeking) of rights by frequent cancellation has created further opportunity for rent seeking) High (direct intervention Inefficient (rights were not by the state) allocated to those who valued them most. State officers were not found to be always value maximizers who learn rapidly from their mistakes) High (severe competition Inefficient (large monopoly rent to secure rights; resource created greater deadweight welfare spent to capture already loss, which was further produced goods left in the exacerbated by regulations that public domain) were incompatible to welfare enhancement)

Net effect Negative

Negative

Negative

Negative

166 

M. D. MIAH AND Y. SUZUKI

8.3   Toward an Appropriate Structure of Rights State needs effective enforcing power to guard subject’s property. The source of power depends on different elements in different circumstances as do their consequences on property rights. We have shown that state’s power is tenuous as far as Bangladesh is concerned. One reason Migdal (1988) pointed out is that the nation has not yet passed a sufficient period of statehood. On the other hand, the politics and political parties are very fragile. Bangladesh has experienced several political regimes, including military authoritarian and parliamentary democracy. Neither of them seems to be stable. Political parties have frequently failed to stand firm on their own ideological identity. Moreover, major political parties in Bangladesh differ marginally from one another in terms of their public support. This can be attributed to the lack of leadership capability to mobilize mass population by any single party. Moreover, there is no ideological distinction between the two major parties. Thus, they rarely hesitate to detour from the core ideology if political benefits can be achieved. This has been manifested by the fact that frontline political parties show leniency in forming coalitions with small political factions of contrasting ideology merely to achieve political gain. This leaves small political factions with an increased bargaining power. As such, they can easily hold up major parties to fulfill their demand for state-sponsored resource redistribution. Moreover, losers possess sufficient power to resist any change initiated by the state toward welfare-enhancing property rights. As a result, both democratic and dictatorial governments have created rents for coteries through changing the structure of rights. No government in Bangladesh was powerful enough to destroy the old-established tradition of state intervention. But rather, selective enforcement of property rights was instituted, which helped existing ­business entities to augment their rents. This tradition has deterred the development of a large and fragmented business sector in Bangladesh. Thus, the existing small and concentrated business group, which mostly constitutes family conglomerates, makes the state captive. The bank loan default case discussed in Chap. 5 provides a clear evidence of this claim. Further support is provided by the increased tendency of businessmen to actively involve with politics. This gives them a favorable bargaining power for redistribution of resources. Since political parties are weak and are in need of support from clients, bottom-up rent seeking dominates the cur-

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

167

Table 8.3  Different combinations of state-business relations State capacity

Business sector

Small and concentrated

Large and fragmented

Strong

Weak

II. Developmental state Property rights: Strong and selective Rent outcome: Large and positive Example: East Asian NIEs during their rapid growth phase III. Laissez-faire economy Property rights: Strong and universal Rent outcome: Small and negative Example: Advanced industrial states

I. Predatory state Property rights: Weak and selective Rent outcome: High and negative Example: Slow transition economies IV. Fragile state Property rights: Incoherent Rent outcome: Large and negative Example: Economically stagnant countries

rent state-business relation in Bangladesh. Thus, Bangladesh can be placed in quadrant I of Table 8.3. Table 8.3 considers only two extreme forms of a state, that is, strong and weak, for simplicity. The same applies to the business sector as well. This, however, does not nullify the possibilities of other combinations to emerge. However, this simple model suffices to clarify our viewpoints on property rights and rent seeking. Countries in quadrant I grow economically but much slower than their actual potential, which can be attributed to negative rent outcome. A transition to an alternative higher growth model is thus warranted. Three possibilities are available. However, quadrant IV is the worst among all the feasible alternatives. The decentralized ‘patron-client’ network reflected in the ‘fragmented’ structure of political power would result in growth-­ retarding outcome of rent seeking. We should note that the ‘fragmented’ does not necessarily mean ‘laissez-faire’. Rather, we often observe the existence of dominant classes in the economy, and they are competing each other for seeking rent opportunities, then occasionally compromising and interlocking the inefficient structure of rights. Even in quadrant IV (weak state), in theory, if the ‘laissez-faire’ structure of political power (no or less dominant classes) is installed, free competition would filter out competitive industries.

168 

M. D. MIAH AND Y. SUZUKI

This effectively leaves two choices, either quadrant II or quadrant III, to model an economy that currently belongs to quadrant I.  The dominant strategy is to shift to quadrant III or laissez-faire system. We have identified (in Chap. 2) essential characteristics of this state, which we call ‘limited government’. State tries to cut its interventionist role in the economy to the greatest extent. Free competition filters out competitive industries to survive while weeding out incompetent or inefficient entities. Only stable and mature democratic countries belong to this category. Here, state as a whole is strong in the sense that no individual organ of the state—judiciary, executive, or legislative—holds supreme power to squeeze other branches of the state. Check-and-balance is properly stored so that a suboptimal allocation of resources by a single branch of the state is effectively contested out by other branches. Similarly, the business sector is large and highly fragmented, which may occasionally attempt to maneuver political decisions to their favor. However, negative rent outcome is cancelled out by excess competition between and among the contesting parties. Rentseeking input or cost which is a bare minimum turns to be social waste Considering the strengths and weaknesses of Bangladesh, it is impractical to suggest that the country should immediately move to this form of state. Like many other developing countries, state intervention in Bangladesh has transformed into an integral part of the economy. State justifies its intervention on economic activities, arguing that the current trend of far-reaching globalization, which has created a culture of global corporatism, may effectively weed out industries in developing countries if some protective mechanisms are not put in place. In other words, state cannot simply take its hands off. This leaves our choice to quadrant I, which is characterized by the developmental state model.1 Essential requirement of this state is not an intervention-free society, but state intervention would mean to create rent that is productive. The amount of rent may be large but stays positive. A strong state cannot squeeze rent out of the small and concentrated business sector. Similarly, business sector cannot overwhelm the state on their demand for unproductive rent. In this prisoner’s dilemma case, the best feasible outcome is the cooperation under the ‘mutual hostage’ scenario. State is committed to support selective property rights. Rent output is large because only a few can avail the access to this coalition, which creates an incentive for businesses to stay efficient and competitive. East Asian newly industrialized economies (NIEs) have showed the way how state intervention can create rents instead of dissipating them.

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

169

One dominant characteristic of the developmental state model is that the state is strong. Bangladesh, as a state, is weak and needs to focus on increasing its capacity. Khan (2004: 183–184) points out the necessary elements for state capacity building: Obviously institutional capacity is important: enforcing or transforming a property rights system is impossible without the appropriate bureaucratic capacity. At the same time, however, institutional capacity is insufficient without effective political capacity to overcome the resistance of powerful social groups who are opposed to particular property rights transformations or the implications of particular rent-management strategies.2

This implies that Bangladesh needs to start its cruise toward a strong state. The process is not something that can be achieved overnight. It is a long process but not unattainable. What is important at the outset is to know the necessary tools required for the transition. The developmental state model thus offers some critical lessons for Bangladesh.

8.4   The Developmental State Model: A Focus on Korea and Japan East Asian economies—Japan being the predecessor, followed by four tigers South Korea, Taiwan, Singapore, and Hong Kong—witnessed a growth miracle in the last few decades. Compared to other NIEs, South Korea shares its earlier economic history with many underdeveloped countries today. For instance, the GNP per capita of South Korea in 1963 was US$143 (at current price) while average GDP per capita of Bangladesh from 1961 to 1970 was US$163 (1985 price) (Kuznets 1994). Before 1961, almost half of South Korea’s total GDP (46 percent) was contributed by agriculture, 17 percent by industry, and the remaining by the service sector. At the same time, 66 percent of the total employable labor was employed in agriculture and 9 percent in the industry. This scenario substantially visions the early history of Bangladesh. Thus, the success story of South Korea can be a great lesson for those economies, including Bangladesh, which aim to graduate from their underdeveloped economic status. In the South Korean development history, Park Chung-hee regime (1961–1979) deserves special attention because the regime sowed the seeds for the country’s development. Clifford (1998: 33–34) sketches briefly the place of Park in South Korean history:

170 

M. D. MIAH AND Y. SUZUKI

If there is one day that marks the beginning of the history of modern Korea, it is May 16, 1961 …. Park Chung Hee took over Korea promising to do away with the “evil legacies” of Korean history, end corruption, rebuild national pride, and spur economic development. During his eighteen years of rule Park converted most of these hazy revolutionary slogans into reality with thoroughness …. From May 16 coup until his assassination in 1979, Park Chung Hee was the nation’s schoolmaster and its chief economists.

The Park Chung-hee regime can be characterized by a strong state in the sense that the dictator established monopoly control over the major economic and political institutions. Soon after he assumed power, Park banned political parties and imposed restrictions on activities of political organizations and unions by instituting martial law. Freedom of speech was abrogated through bringing the press under stringent censorship. These activities were legitimized by the fact that pervasive corruption and cronyism pervaded all spheres of Korea during the last two republics before the Park regime. Moreover, a special revolutionary court and prosecution office was established to bring to justice those who were accused of various crimes, including the illicit accumulation of wealth and corruption. In 1962, 4369 politicians and government officials were forbidden from participating in politics unless they underwent a screening by the military, a process that cleared all but 74 politicians (Haggard et al. 1991). In July of that year, about 2000 government officers, including 40 generals, were sent to retirement. Like a common ritual for military dictators, Park wanted to provide his regime a civilian façade. The Democratic Republican Party (DRP) was formed to establish one-party rule in South Korea. Later, Park accepted the nomination from the party and managed a very thin political victory amidst fragmented and politically tainted opposition. Upon his victory, the constitution returned to the presidential system, with a weak legislature (Haggard and Moon 1990). The president preserved the prerogative to appoint the cabinet members, including the prime minister. The president also enjoyed a range of emergency powers, including the ability to constitutionally restrict the freedom of the press, assembly, and speech. This structure placed various restrictions on political activities to weaken not only the legislature but also all political parties. Park also intended to put a hand on the judicial system. He thus executed several constitutional and judicial reforms during his third (1962–1972) and fourth republic (1972–1979). Under the new constitu-

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

171

tion of the third republic, the Supreme Court was given final authority to review the constitutionality of the statute as well as other governmental actions. Judicial independence was maintained to a certain extent. For instance, the constitution provided the president the right to appoint the chief judges with the consent of the national assembly upon recommendation of the Justice Recommendation Council. The Justice Recommendation Council comprised four judges, two lawyers, one professor of law appointed by the president, the Ministry of Justice, and the prosecutor general (Yoon 1989). However, Park did not hesitate to take the independence away when the judiciary threw a challenge to Park’s leadership. For example, in 1970, the Supreme Court upheld a lower court decision that prevented the government from withholding compensation to military personnel who sustained injuries on duty. At the same time, the court struck down an amendment that had attempted to raise the voting threshold for the Supreme Court to declare a law unconstitutional. The president was ­furious by the audacity shown. This was followed by the Yushin (revitalizing) reform in 1972, which changed the constitution to allow Park indefinite time in the presidency. Moreover, the Supreme Court was deprived of the final authority to review the constitution by revising the constitutional committee, which was composed of nine members, selected three each by the president, the National Assembly, and the chief justice (Yoon 1989). Since the chief justice was appointed by the president, the majority of the constitutional committee members were apparently under the control of the president. Judicial review would remain dormant for the next decade and a half of military rule until the beginning of 1980s. What distinguished Park from other military dictators was his capacity to direct the concentrated power of the state to economic development. To achieve this objective, he initiated several economic reforms. Particularly, Park established the Economic Planning Board (EPB) by combining various planning-oriented departments. With EPB, the Ministry of Finance and the Ministry of Trade and Industry were set to be the pioneers in the development of the Korean economy. In this pursuit, Park recruited talented and bright students for EPB. In order to tap such talented human resources, the status of EPB was elevated by upgrading the status of its minister equivalent to deputy prime minister who also had the direct chairmanship of economic ministers. The foremost task of EPB was to design five-year plans which aimed at shifting import substitution

172 

M. D. MIAH AND Y. SUZUKI

industrialization to export-oriented growth. As a result, EPB became the brain of the Korean economy. Park was aware that controlling capital is the chief means to control business sector. In October 1961, private banks in Seoul were nationalized and the Ministry of Finance was put in charge of these nationalized banks, along with several policy banks. Foreign capital was also brought under state control. Moreover, the nationalization of commercial banks was accompanied by the control of central bank, Bank of Korea (BOK). The authority of monetary policy to check money supply and inflation was shifted to the Ministry of Finance from the BOK. The amendment further empowered the president with the right to appoint the governor for BOK. Through nationalization of banks, state control on financial sources extended to operation level, ranging from approval of loan applications to appointments of top bank management and endorsement of the annual budget. Johnson (1987: 148) notes, “[T]he most potent instruments for implementing economic policy have undoubtedly been control of bank credit and access to foreign borrowers.” Companies in South Korea borrowed on the strength of personal relationships. Government guaranteed the banks that they would be taken care of in the case of borrowers’ bankruptcy. Interest rate on deposits was set lower than the market rate. Banks extended loans to these Chaebols (large family-owned business conglomerates) according to the direction of the state at discounted interest rate. Clifford (1998) reports that the share of so-called policy loans, or explicitly directed by the government, increased from 47 percent in 1970 to 60 percent in 1978. Since loans were granted by the outright government order, banks had the capability neither to screen the loan application nor to monitor lenders. As a result, banks’ profitability was severely undermined. In addition, Park provided government-guaranteed repayment in 90 percent of all commercial bank loans. Around 40 percent of the commercial loans between 1959 and 1968 had government-guaranteed repayment and 50 percent had state-­ owned local bank–guaranteed bank repayment (Kim 1997). The credit policies thus were well coordinated with other economic policies. Merely lending to private enterprises from state-owned bank does not mean that much has been done by the state. However, the loans were extended at a greater discounted rate for creating rents to the priority sector, specially industries with good prospect of exports. For example, when the interest rate reform was implemented in 1965, the nominal interest rate doubled while the interest rate on export credit remained unchanged

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

173

(Cho 1998). The gap between the interest rate on general lending and interest rate on export lending was so big that firms could simply make profit because of the low cost of capital. Multiplying total bank loans to the export sector by the interest gap between curb market rate and export loan interest rate yields an amount of total rents equivalent to 4–6 percent of the GNP in 1960s when bank interest rate was significantly high (Cho 1998). Park was keen not only to support the existing entrepreneurs but also to establish new firms. For example, 144 firms were established by the 10 largest Chaebol during the Park regimes compared to 26 in the regime of Park’s predecessor, Rhee (Kim 1997). Moreover, firms that were established during the Park period contributed a significantly larger share of total assets compared to Rhee-period firms. On average, the formers were responsible for 70 percent of each Chaebol total assets in 1983 while the latter were responsible for 22 percent. Five out of the 10 largest Chaebols had more than 70 percent of their assets from Park-period firms. On the other hand, seven Chaebol had less than 30 percent of their assets from Rhee-period firms (Kim 1997). At the end of 1989, there were 43 Chaebols in Korea (Choi and Cowing 2002). These Chaebols were expanding rapidly compared to independent or non-Chaebol firms. The six largest Chaebols—Hyundai, Samsung, LG, Daewoo, Sunkyong, and Ssangyong—experienced average annual growth rates 50.9 percent in terms of sales and 16.2 percent in terms of gross output over the period 1973–1980 (Choi and Cowing 2002). Not only were the Chaebols breeding under the direct auspices of the state, but also their contribution to the growth was overwhelming. The top 20 Chaebols contributed 7.1 percent of the total GDP in 1973, which rose to double in 1978 (Lim 2003). What differentiates Park’s Korea from other crony capitalism was Park’s ability to pick winners. Daewoo excelled in developing the construction industry in South Korea and was considered a worthy partner of Korean industrialization. As a result, Park extended his help to Daewoo. Given Daewoo’s close link with Park, it was able to receive substantial unofficial assistance when successfully fulfilling Park’s target of developing the shipbuilding industry. Cho Chung-hun of Hanjin received increased assistance after successfully turning around the formerly government-owned Korean Airlines in the late 1960s. On the other hand, firms performing badly were allowed to go bankrupt despite having strong ties with Park. Yonhap Steel, one of the largest

174 

M. D. MIAH AND Y. SUZUKI

companies in South Korea in the 1960s, had the patronage of Lee Hu Rak, who was the Korean Central Intelligence Agency’s (KCIA) director, but the failure to convert the company into an export machine led to its decline. Discipline may be thought of comprising two interrelated dimensions. First, in industries where the relative strength was precarious because of overexpansion, firms were subject to rationalization or merger by the decree of the state. Second, where the industries were healthy and competitive, discipline had taken the form of refusal by the government to bail out relatively large-scale, badly managed, near-bankrupt firms. A company named Shinjin had a large market share in South Korean automobile industries in the 1960s. Shinjin’s owner, however, could not survive competition from Hyundai’s ‘pony’ and the oil shock in the 1970s. The company went bankrupt and the government transferred Shinjin’s holdings to Daewoo Motors (Amsden 1989). Another early automobile manufacturer, Asia Motors, was also abandoned. In the cement industry, the ­largest producer in the 1970s went bankrupt because it tried to optimize an old technology rather than switching to new technology. Its production facilities were transferred by the government to a Chaebol, the Ssangyong group, owned by one electronics industry, which had an ailing consumer electronics division that failed. Eventually, the government oversaw its transfer to Daewoo Electronics. Construction firms such as Kyungnam and Samho, are typical cases of firms that went bankrupt although they once enjoyed government support tremendously. Government did not rescue them because other firms in that industry were prospering well. A badly managed Chaebol of considerable size that the government punished with dismemberment was the Korea Shipbuilding and Engineering Company. Firms needed to be efficient to receive state’s support, and they had to pay a percentage of their assistance back to the government in the form of political funds. Loans were granted to business on the condition that kickbacks were returned to the presidency and ruling party. As such, Park’s long-run goals of economic development through elevating big business corporations was not merely the result of his philanthropic thinking or mere benevolence; but rather, his regime survival heavily relied on it (Wedeman 1997). The political funds were collected under the name of different social organizations such as Saemaul or New Village Movement, but used for political purposes. It was institutionalized that business firms will kickback a certain percentage of money in exchange for securing

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

175

licenses, bank loans, foreign loans, and other such facilities. Kang (2002b) reports that during the 1960s, the expected kickback normalized at around 10 to 20 percent of the total loan. Kang (2002a: 197) reports Hyundai founder’s excerpt: “I personally handed about 1 billion won yearly during the third republic (Park), about 5 billion won yearly during 5th republic (Chun), and 10 billion won yearly in the 6th republic (Roh)”. The rent-seeking coalition between government and business facilitated mutual cooperation, which brought a win-win situation for both. Government helped keeping the cost of monitoring and rent-seeking minimum by strictly constraining competition for rent seeking. Only the outstanding performers could avail the access to state-created rent. At the same time government was made hostage by the business sector through their contribution to political funds. Without performing, it was impossible for firms to pay the political donation. This dynamic government-­ business relation paid off economically, evidenced by the remarkable economic growth during the Park tenure. However, it is not the case that a developmental state should be autocratic to be a strong state. A state with bureaucratic dominion might also emerge as a strong state to efficiently allocate resources. Japan is a case in point. Unlike South Korea, postwar Japan was governed by civil government. It took only a few decades for Japan to become one of the wealthiest states in the world, and its development was shaped by the state’s direct intervention. Resource allocation was governed by the state through administrative guidance (Johnson 1982). State-business relation was a fundamental building block which ultimately resulted in an economic boom for Japan (Okuno-Fujiwara 1997). In this sense, an analysis of Japanese developmental experience provides useful information for developing countries to strategize their policy options. The super growth period of Japan started in the early 1960s, which lasted until the end of the 1980s. Surprisingly, the Liberal Democratic Party (LDP) reigned the entire period in a row, starting from 1955 and continuously retaining its power until 1993. Thus, it would be tempting to think that LDP held enormous power to penetrate the society on its journey to state-led development. Contrary to this popular notion, political parties were not the epicenters of state power in Japan. LDP’s continuous reign can be attributed more to the weakness of the opposition parties than to the organizational strength of its own (Curtis 1999). LDP’s success was largely the consequence of the failure of any opposition parties to convince voters that it could offer itself as an effective alternative to LDP.

176 

M. D. MIAH AND Y. SUZUKI

There were several factions within the LDP, which indicated that the race among the factions for prime ministerial position was always intense. Leadership change was inevitable when such interfactional feuds reached its peak. Party president was allowed to serve two terms at most, or four years. However, most of the LDP’s leaders in the 1970s and 1980s lasted only one term (Richardson 1998). Between 1955 and 1993, party crisis disrupted party affairs from time to time. At times, party collapse was forecasted and LDP politicians considered forming a new party. Stockwin (1999: 97) argues, “[I]n Japan, the prime minister has typically been a cautious figure, constrained by complex political forces, seeking influence through the assiduous cultivation of consensus, and usually having limited tenure ….very broadly speaking it seems reasonable to describe Japanese prime ministers as ranging as weak and moderately effective.” Instead of political party, the power of the state centered on the country’s bureaucracy. A “well-entrenched state bureaucracy with extensive powers and strong predisposition towards the active pursuit of national interest” (Pempel 1998: 66) has an ancestral root in the samurai of the feudal era who became the administrative officials rather than warriors, but occupied their samurai status. This status passed to the bureaucrats under the Meiji Constitutions and was enjoyed until it was abolished by the Constitution in 1947. That was not the end of bureaucratic superiority. Their successors in the postwar Japan still enjoyed it informally because of the persistence of the tradition and bureaucratic dominion. Stockwin (1999) contends that government officials after the war inherited a long historical tradition of self-­ identification, highly educated elite, dedicated to serve the state. They possessed intrinsic authority rather than extrinsic legal rule-making. Although postwar bureaucrats are not identical to the bureaucratic warriors in the Tokugawa period or the new university-trained imperial bureaucrats of the prewar period, they are always above the law in terms of independent judicial review (Henderson 1973). Bureaucrats do not merely enjoy the power but maintain their inherited samurai code of ethics and elite status. Elitist recruitment of top graduates from the Tokyo Law and Economics faculty are cited as evidence of the bureaucrats’ power and status in Japan (Hills 1981). Bureaucratic influence on government can roughly be understood from data on the submission of legislative bills in the Diet. Most legislative proposals were generated by bureaucratic agency. Richardson (1998) specifies that two-thirds of all bills dealt by the Diet from 1952 to 1990 originated

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

177

in the government—that is, ministries or cabinet. Even Diet-sponsored bills were implemented through administrative guidance. Because of their extensive experience in drafting and proposing legislative bills, bureaucrats were accepted well in politics after their retirement. Johnson (1975: 13) reports “out of more than forty prime ministers in modern history, roughly one third were recruited from high-ranking civil bureaucrats … although the ratio in the postwar world … is close to half than to a third.” Unlike South Korea, the business sector of Japan was not so concentrated. Although Japanese business sector can largely be characterized by the prewar Zaibatsu (large business conglomerates) and postwar Keiretsu (interlocking business relationship among companies), competition between and among firms was intense. Lockwood (1954: 232) uses the ‘dog-eat-dog’ adage to mean the competition encountered by firms in the same industry but belonging to different Zaibatsu. Several reasons have been pointed out in explaining the intense competition in Japan. In a near-closed economy in the 1960s and 1970s, firms’ behavior was notably governed by the government through industrial policy that aimed to ensure economic stability and maintain healthy competition between firms. Caves and Uekusa (1976) find that average concentration ratio of manufacturing firms in Japan was not different from that of the USA. It was unlikely for a particular firm or group of firms to overly influence industrial policy. Moreover, internationalization reduced organized business community’s role as forcing authority. Curtis (1999: 60–61) notes: With the expansion and the internationalization of economy, the business community itself has become increasingly pluralistic. There are conflicts of interest within the big business community that neither Keidanren (Japan Business Federation) nor any other organization can effectively mediate. Differences of opinion on the issue of voluntary export controls on textile and on the rapid liberalization of the computer industry are just two examples of the kinds of issues that are increasingly dividing the business community.

Like Keidanren, Zaikai (commercial and financial community) was formed to enhance the voice of business community but was of no avail. Instances are plenty which show that Zaikai’s effort to influence the LDP politics in general, or presidential election in particular, proved futile (Curtis 1999). This proves that the balance of power between the state

178 

M. D. MIAH AND Y. SUZUKI

and business was skewed toward the state, which can be attributed to the unique nature of bureaucracy. LDP itself as a political party was not so strong because of factional feuds. As a result, LDP placed heavier weight on bureaucrats for economic policymaking. The economic development in Japan thus can be attributed largely to the administrative guidance. Like Park as a dictator in South Korea, the bureaucrats in Japan directed their power to the overall well-being of the country. They mainly guided the business sectors through various policies to what was best for the economy. The administrative guidance, provided without explicit legal power of coercion, played a crucial role in aiding the rapid growth of postwar Japan. In particular, the Ministry of Finance (MOF) and the Ministry of International Trade and Industry (MITI) issued ‘advisory remarks’, ‘request’, ‘notices’, and ‘opinions’ to private industries and businessmen in accomplishing the goals of the governmental agencies (Yamamura 1993: 122). MITI enjoyed enormous leeway to oversee operations of all the country’s strategic sectors, which can be attributed to its capacity to reach a consensus with industries as well as its wider scope and authority over the manufacturing sectors. In addition, MITI’s emphasis on promotional rather than regulatory policies and its minimal reliance on formal legislation helped it represent itself to the business sector as a development partner rather than a regulatory body. As a result, acceptability of MITI to the business and industrial segment of the country  increased significantly. Johnson (1982: 25) notes, “MITI may be an economic bureaucracy, but it is not a bureaucracy of economists.” The primary focus of MITI’s administrative guidance centered on nurturing certain industries to ensure the quality of products for commercialization as well as innovative strategies to regulate excess competition so that international competitiveness can be achieved through economies of scale. MITI thus enacted some policies known as ‘institutions of high-­ growth system’, which included gripping the control over foreign exchange, import of technology and incubate local high-tech industry, dispensing preferential financing such as loans, tax brackets, and so on (Johnson 1982). Foreign Exchange Law, which aimed at regulating inflows and outflows of capital, was necessary to insulate the Japanese capital market from the influences of foreign capital so that international forces could not impede the proper functioning of economic policies at home. Johnson (1982) notes that it was the single most important instrument of industrial guid-

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

179

ance and control that MITI ever possessed. Pempel (1998: 51) rationalizes such regulation, arguing that if the inflow and outflow of capital were not regulated, the domestic system of regulated interest rates could easily be circumvented. In an interventionist state, the success of administrative guidance depends largely on the structure of its system of capital allocation (Zysman 1983). During Japan’s heyday, capital was channeled through the banking system, over which state had an enormous influence. Its complementary channel, the capital market, was highly regulated and suppressed. Tight control on foreign funds, coupled with extensive regulations on capital markets, forced private firms to rely on banks. This worked as an effective tool to ration and channel credits to targeted sectors. At the same time, firms were encouraged by setting the regulated interest rate lower than market rate. The Bank of Japan directed a particular bank to become the lead bank or main bank for certain firms to supply the major portion. Johnson (1982) estimates that the rate of owned capital for all corporations in the prewar period was about 66 percent, which declined to 16 percent in 1972. The gap was filled by bank finance. Hoshi and Kashyap (2001) report that during 1956–1965, equity capital constituted 19 percent of the total external finance of firms, which declined to 12 percent during 1966–1975. Borrowing from banks on these respective periods accounted for 76 percent and 83 percent. The package of government intervention is incomplete without its essential component of tax incentive. Under tax incentive policies in Japan, a number of special measures were formulated to promote exports, private savings and investment, and technological development. Such measures included tax exemptions, tax-free reserves, and accelerated rate of depreciation. They played a critical role in contributing to the economic growth, especially in the 1960s and 1970s. Estimation shows that revenue loss resulting from concessionary taxation, or what is called special tax measures, accounted for 13.2 percent of the total income tax revenue in the 1950s and 12 percent in 1965 (Ishi 2001). State intervention during the heyday of Japan was justified by the deep-­ seated doubts that unfettered market can advance the common goods and achieve specific national goals. Thus, government had to intervene through growth-enhancing initiatives within the general framework of the market. Business sector was not a cohesive with a coherent policy demand. Instead, it has become more pluralist in structure since the 1960s; its opinions were more fractionalized; and its public stance on political issues sug-

180 

M. D. MIAH AND Y. SUZUKI

gests decreasing influence and increasing competition with other sectors. Similarly, political parties supported administrative guidance, may be due to their inner weakness or trusting ideology. This created an enormous room for bureaucrats to lead the country toward economic success.

8.5   How a Developmental State Model Fits the Bangladesh Case? It is imperative to assess if Bangladesh can fit the developmental state model. The essential characteristics of the South Korean developmental state model were the concentration of power at the top, a small but concentrated business sector. A strong judiciary was not the necessary ­prerequisite as far as the super growth period of South Korea is concerned. Park entertained privileged access of certain business groups to the bounty of resources under the control of the state. They were allowed license, restricted quota, tax rebates and subsidies, financial support and much more. However, one condition attached to these privileges was ‘performance’. Firms had to prove through their performance and efficiency that they deserve the preferential treatment because Park was unwavering in picking the winners than the losers. Maybe such a strategy stemmed not merely from his sheer attitude of benevolence or a pure dedication to the economic development of Korea but from a rational choice, indeed. His ambition, being a dictator, to stay in power depended on a host of critical determinants. South Korea was in total disarray economically at the time when Park ascended to power. The country was newly decolonized, ended its devastating North-South war, and a period of high corruption flourished during Roh’s regime. As a result, people remained silent even though Park assumed power through an unwarranted means. Park considered this silence as a moral approval of the mass for his regime. Thus, he was agile to people’s demand, which was legitimate and attainable with Park’s capacity. In this sense, striving for economic progress of South Korea was the rational choice that matched well with Park’s ambition to be on top of the country’s politics. However, the way of achieving this objective may be questionable. Park’s preferential treatment to certain coteries may have created a state of cronyism. Rent seeking was pervasive, and corruption was rampant. However, his motto of ‘picking the winner’ subdued the negative effect of rent seeking and corruption on the economy because the competition at

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

181

the bottom of the rent-seeking chain was restrained by picking the winners only. In addition, the rights granted to the preferred groups were guaranteed through credible commitment, which helped to limit competition for rent seeking, leading to the minimum rent-seeking cost. In exchange, Park was uncompromising in seeking funds required for his political survival. Firms which could perform economically only matched this demand of the dictator. This interdependence created a situation of mutual hostage in which the state allowed privileged access to certain groups to the state-sponsored resources, which, in turn, kicked back a portion of the pie augmented through their performance. In this relation, cooperation as opposed to exploitation was the dominant strategy. Economic progress was the eventual outcome. Bangladesh was under military rule for nine consecutive years, perhaps the longest period that a single party or individual consecutively ruled the country so far. Unlike Park, the military dictator in Bangladesh could not establish his stronghold on politics as well as state’s organs. He faced tremendous political revolt from the two main opposition parties. Moreover, the bureaucrats were not as effective as we observed in the case of South Korea or Japan so that they could led the nation when the struggle for political survival at the apex swayed the concentration from the economy. This circumstance resulted in lackluster economic performance, which failed more often than not to satisfy the masses at the bottom. Thus, the dictator did not receive moral support from the general public of the country. It is true that the dictatorial regime in Bangladesh can be characterized neither by a predatory state like what prevailed in the Philippines under Marcos nor by a mutual hostage case that characterizes Park’s Korea. It was rather a bottom-up rent seeking in which a small and concentrated business sector squeezed privileges out of state’s weakness. State could not control excess competition for rent because of lack of power, neither it was able to accommodate all the contenders in the rent sharing coalition. Rent-seeking cost was enormous, which, in turn, led to the net rent outcome negative. What is important to notice here is that like Park, the dictator in Bangladesh failed to pick the winners. The trend continued even in the democratic regimes. In Japan, political parties are not the locus of state power. However, bureaucracy acts as a complementary institution to politics as far as the economic activities of the country are concerned. The efficiency of bureaucrats has sufficiently compensated sate weaknesses. Or

182 

M. D. MIAH AND Y. SUZUKI

its adverse effects on the national economy was curbed. This has been possible because the bureaucrats maintained a tradition of high morale owing to their ancestral root to the samurai, who used to be the symbol of power and prestige. Even though the samurai spirit has eroded in modern Japan, the tradition of maintaining high morale among Japanese bureaucrats still remains in place because they are recruited and promoted based on merit. As a result, they still enjoy power and prestige and are provided with the tool of administrative intervention in the economy. Using informal administrative guidance under broad delegations of authority from the legislature, the state was able to maintain flexibility and achieve its goals without extensive legal procedures. It would thus be sensible to argue that Bangladesh can adopt some characteristics of a developmental state without changing much of its current sociopolitical underpinnings. The source of state weakness in Bangladesh is the legitimacy crisis of the political parties and personalized politics. Political parties should have their own ideology and a strong commitment to uphold it. These changes do not come abruptly and require a long process of statehood as well as changes in the political system. Surely, they should be the long-term target of the country. Toward this end, some means are essential which can be implemented without much change. Bureaucratic-led administrative guidance can be the starting point. At present, bureaucracy is highly centralized to the party in power. Recruitment and promotion depend on party affiliation rather than merit. This ultimately results in inaccurately modeling economic policies. Thus, any reform initiative for effective control on unproductive rent seeking rests on nurturing meritocracy among the bureaucrats. In so saying, we are assuming that the national education system is capable of producing a pool of talented and skilled human resource. In Japan, huge investment in education infrastructure facilitated the rise of human resources with adequate skills and knowledge, who later emerged as the middle class to assume the leading economic role of the country. Thus, a prescription of bureaucratic-led strong state depends critically on the availability of a pool of talented human resources. If this prerequisite is absent, it has to be fixed first. Now the issue for legislatives is how to monitor bureaucrats. In South Korea, bureaucrats were under tight control of the president. Any deviation from the dominant strategy would have resulted in invocation of authority. In Japan, the talented and skilled human resources were influenced by the samurai spirit of morality and prestige, which played an

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

183

essential role in establishing a self-monitoring mechanism. Absence of these elements in Bangladesh calls for an independent judicial system. Judiciary, if bestowed with sufficient discretion and power, can play the monitoring role in a democratic country. How do these reforms match with political parties’ dominant strategy? We assume, and realistically so, that politicians want to stay in power. The Bangladesh experience shows an anti-incumbent sentiment if elections are held in a free and fair manner. This means the two major political parties come to power by turn, which can be attributed to their inability to meet the expectations of the mass population. Thus, political choice should concentrate on how to satisfy constituents. Bureaucrats selected based on merits and talent can effectively implement legislations that are better for the constituents. Moreover, in a judicially enforceable procedural right, politicians can decentralize the monitoring function so that the public can bring suits to inform politicians about bureaucratic failure to follow instructions. The courts can serve as a mechanism to discipline the agents. This means that an independent judiciary is not merely beneficial for the society, but the politician can also be benefited from an impartial court system. This should mark the beginning of empowering the state, given the existing sociopolitical characteristics of Bangladesh.

8.6   Conclusion Empirical analysis in the previous few chapters on the nature of resource distribution, which has been summarized here, shows that the dominant state business relation in Bangladesh results in excessive rent seeking, which seriously undermines the productivity and growth of the country. Moreover, the inefficient interlocking structure of property rights resembles the characteristics of institutional failure. Thus, a system of resource distribution that is conducive to growth and productivity requires institutional change. However, it does not come without cost and resistance. Resistance stems from the incumbent rent-seekers who are subject to lose by the change. Thus, state’s capacity to avoid such resistance is an essential prerequisite for efficient property rights to evolve. Drawing lessons from the development experiences of two supposedly strong states, Japan and South Korea, this chapter discusses ways and options for Bangladesh to have a better set of institutions of property rights.

184 

M. D. MIAH AND Y. SUZUKI

It has been argued that Bangladesh has many lessons to learn from the development experience of South Korea and Japan. In particular, the development experience of these two countries shows that it is not essential for the government to take its hands off the business. But rather, government-­business relation in which government chooses the winners, as part of its dominant strategies, can reduce unproductive rent seeking and thereby facilitate productivity and growth. This will require prioritizing meritocracy and talent in recruiting and promoting bureaucrats who can mitigate the weakness of political parties to a great extent. In addition, judicial independence is warranted to establish sufficient checks and balances.

Notes 1. Quadrant II is a transitory phase. Development history shows that rapid growth or super growth period does not last long. It is also a transition phase from developmental state to mature state. 2. Emphasis added.

References Amsden, A. H. (1989). Asia’s Next Giant: South Korea and Late Industrialization. Oxford University Press. Caves, R. E., & Uekusa, M. (1976). Industrial organization in Japan. Brookings Institution. Cho, Y. J. (1998). Government Intervention, Rent Distribution, and Economic Development in Korea. In A.  Masahiko, H.-K.  Kim, & M.  Okuno-Fujiwara (Eds.), The Role of Government in East Asian Economic Development: Comparative Institutional Analysis (pp. 208–232). Oxford: Oxford University Press. Choi, J.-P., & Cowing, T. G. (2002). Diversification, Concentration and Economic Performance: Korean Business Groups. Review of Industrial Organization, 21(3), 271–282. Clifford, M. L. (1998). Troubled Tiger: Businessmen, Bureaucrats and Generals in South Korea. New York: M.E. Sharpe. Curtis, G. L. (1999). The Logic of Japanese Politics: Leaders, Institutions, and the Limits of Change. Columbia University Press. Haggard, S., Kim, B.-K., & Moon, C. (1991). The Transition to Export-led Growth in South Korea: 1954–1966. The Journal of Asian Studies, 50(4), 850–873. Haggard, S., & Moon, C. (1990). Institutions and Economic Policy: Theory and a Korean Case Study. World Politics, 42(2), 210–237.

  TOWARD AN APPROPRIATE STRUCTURE OF RIGHT 

185

Henderson, D. F. (1973). Foreign Enterprise in Japan: Laws and Policies. Chapel Hill: University of North Carolina Press. Hills, J. (1981). Government Relations with Industry: Japan & Britain: A Review of Two Political Arguments. Polity, 14(2), 222–248. Hoshi, T., & Kashyap, A. (2001). Corporate Financing and Governance in Japan: The Road to the Future. MIT Press. Ishi, H. (2001). The Japanese Tax System. Oxford: Oxford University Press. Johnson, C. (1975). Japan: Who Governs? An Essay on Official Bureaucracy. Journal of Japanese Studies, 2(1), 1–28. Johnson, C. (1982). MITI and the Japanese Miracle: The Growth of Industrial Policy: 1925–1975. Stanford University Press. Johnson, C. (1987). Political Institutions and Economic Performance: The Government-Business Relationship in Japan, South Korea, and Taiwan. In F.  C. Deyo (Ed.), The political economy of the new Asian industrialism (Vol. Cornell studies in political economy, pp. 136–164). Ithaca: Cornell University Press. Kang, D.  C. (2002a). Bad Loans to Good Friends: Money Politics and the Developmental State in South Korea. International Organization, 56(1), 177–207. Kang, D.  C. (2002b). Crony Capitalism: Corruption and Development in South Korea and the Philippines. Cambridge University Press. Khan, M. H. (1995). State Failure in Weak States: A Critique of New Institutionalist Explanations. In H. John, H. Janet, & L. Colin (Eds.), The New Institutional Economics and Third World Development (pp. 71–86). London: Routledge. Khan, M., H. (2004). State Failure in Developing Countries, and Institutional Reform Strategies. In B.  Tungodden, N.  H. Stern, N.  Stern, & I.  Kolstad (Eds.), Toward Pro-poor Policies: Aid, Institutions, and Globalization. World Bank Publications. Kim, E.  M. (1997). Big Business, Strong State: Collusion and Conflict in South Korean Development, 1960–1990. New  York: State University of New  York Press. Kuznets, P. (1994). Korean Economic Development. Connecticut and London: Praeger Publishers. Lim, W. (2003). The Emergence of the Chaebol and the Origins of the Chaebol Problems. In S.  Haggard, W.  Lim, & E.  Kim (Eds.), Economic Crisis and Corporate Restructuring in Korea: Reforming the Chaebol (pp.  35–52). Cambridge: Cambridge University Press. Lockwood, W. W. (1954). The economic development of Japan: growth and structural change, 1868–1938. Princeton University Press. Migdal, J. S. (1988). Strong Societies and Weak States: State-society Relations and State Capabilities in the Third World. Princeton University Press. Okuno-Fujiwara, M. (1997). Toward a Comparative Institutional Analysis of the Government-Business Relation. In M.  Aoki, H.-K.  Kim, & Oku (Eds.), The

186 

M. D. MIAH AND Y. SUZUKI

Role of Government in East Asian Economic Development: Comparative Institutional Analysis (pp.  376–403). Oxford, New  York: Oxford University Press. Pempel, T. J. (1998). Regime Shift: Comparative Dynamics of the Japanese Political Economy. Cornell University Press. Richardson, B. (1998). Japanese Democracy: Power, Coordination, and Performance. New Haven, London: Yale University Press. Stockwin, P.  J. A.  A. (1999). Governing Japan: Divided Politics in an Major Economy. London: Blackwell Publishers. Wedeman, A. (1997). Looters, Rent-Scrapers, and Dividend-Collectors: Corruption and Growth in Zaire, South Korea, and the Philippines. The Journal of Developing Areas, 31(4), 457–478. Yamamura, K. (1993). The role of government in Japan’s “catch-up” industrialization: a neoinstitutionalist perspective. In H.-K.  Kim, Muramatsu Michio, T. J. Pempel, & K. Yamamura (Eds.), The Japanese Civil Service and Economic Development: Catalysts of Change (pp. 102–134). Oxford: Clarendon Press. Yoon, D.-K. (1989). Judicial Review in the Korean Political Context. Korean Journal of Comparative Law, 17, 133. Zysman, J. (1983). Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change. Ithaca: Cornell University Press.

CHAPTER 9

Conclusion

Property rights and economic prosperity are intricately linked in the sense that the institutional setting of property rights dictates and governs the allocation of scarce resources. Countries that have been able to well align resource allocation to the overall welfare of the society are economically developed. In contrast, countries that have a property right system that fails to link the efforts devoted to an activity to the reward resulting from it are economically underdeveloped. Thus, the difference in economic performance across countries can be attributed, to a large extent, to the differences in their respective property right systems. Despite its widespread importance, property rights are not uniformly mechanized or universally enforced across countries. In other words, some countries cannot simply get the property rights right. Various theories have evolved to explain why property rights in some societies are inefficient or are not welfare-enhancing. Neoclassical theory or the transaction cost theory is notable among them, which attributes the inefficiency in resource allocation to some market failures, possibly caused by high transaction cost. We recognize the merits of the mainstream theory; however, we are of the view that factors with which the theory is preoccupied are necessary at best but not sufficient to explain why certain structures of property rights emerge in a particular society. The mainstream model does not include government or enforcing authority as an element that can affect the nature, causes, and consequences of property right. A realistic model requires that government should be considered an © The Author(s) 2018 M. D. Miah, Y. Suzuki, Power, Property Rights, and Economic Development, https://doi.org/10.1007/978-981-13-2763-6_9

187

188 

M. D. MIAH AND Y. SUZUKI

important variable that affects greatly the nature and consequences of property rights. In fact, a certain pattern of resource allocation at a particular point in time can be explained by the relative balance of power between government and business. Thus, the analytical approach followed in this book departs from the standard model of property right. Political actors create or maintain political institutions to pursue their own goals. However, they cannot simply change an existing inefficient structure of rights to a better one even if they wish to do so because the proposed change creates losers and gainers. If losers can impose a substantial political cost, change is unlikely even if it is welfare-enhancing. This implies that change in property rights depends on whether the state possesses enough capacity to absorb or avoid political cost. A strong state can absorb the cost and initiate value-enhancing rights whereas a weak state cannot. Under this broader analytical framework, the book examines the case of Bangladesh. Recent economic performance of the country has created a lot of confusion and, equally, curiosity among scholars and policymakers. Curiosity has mainly evolved from the fact that the country has been recording moderate economic growth since the beginning of the new millennium amidst numerous obstacles. Confusion, on the other hand, primarily centers on the question as to how economic performance of the country can be accelerated so that its de facto performance matches the actual potential. It is to be noted that economic performance is the result of a complex interaction between different elements in a certain mode of production, composed mainly of an economic subsystem and a cultural and institutional subsystem. Existing development literature focuses mainly on the economic subsystem in explaining the economic underdevelopment of Bangladesh and completely ignores its cultural and institutional subsystem. This is, indeed, a deficiency of the development literature. We thus emphasize the importance of the ‘mode of production’ or ‘ownership pattern on factors of production’ and then assimilate the situation to the case of Bangladesh. This requires, first, to review the political history of Bangladesh to assess the state’s capacity vis-à-vis society. We thus broadly cover the history of Bangladesh politics since its independence to examine the nature of political parties and their policies to develop the country. Our analysis reveals that all the political parties suffer from legitimacy crisis. No party can firmly commit on their own ideology to attract a large base of popular support, which forces them to vie for alliances to form a coalition with

 CONCLUSION 

189

small political parties and other factions. These factions can hold large and mainstream political parties hostage in the political bargaining process. Moreover, mainstream parties attempt to accommodate these small factions in the power-sharing coalition by promising them privileged access to state-controlled resources. In addition, the business sector of the country is small and concentrated, which occasionally squeezes benefits from the weak state. This tendency has created an environment of unproductive rent seeking. Since a weak state cannot commit to maintain the privileged access once it is granted, rent-seeking competition at the bottom increases, leading to the higher rent-seeking cost. Political incumbents, on the other hand, attempt to perpetuate the weakness of institutions, which permits the clientelist politics to thrive. Inefficient property rights thus survive as a dominant strategy under the existing state-business interaction. Evidence to support the above proposition is provided by analyzing some cases carefully drawn from legal lawsuits and non-legal matters relevant to the concerned issue. Specifically, cases related to non-market allocation, including the allocation of broadcasting frequency, assigning license and permits, and also price control, are discussed. The analysis reveals that new rights emerge, as well as the existing rights change in response to the political demand even if they are socially inefficient. The cases of non-market allocation expose the typical clientelist politics and the errors of omissions committed by the regulatory authority. In addition, the cases of price control confirm the power of property rights framework. Price control yields lower net social benefits in a circumstance where perfect delineation of all attributes that affect the variability of output of the asset is infeasible. In the context of Bangladesh, price control has proved to be an inaccurate model of resource distribution. The book finally sketches an outline as to how a shift from the existing inefficient structure of rights toward a more efficient one can be instituted. Several possible alternatives are explored and examined, juxtaposing them with the existing sociopolitical circumstances of Bangladesh. Although it can be concurred that the limited government in which state intervention on business is minimum is the best alternative, such a strategy might be politically too costly to follow. In a state of immature democracy and an absence of an impartial judicial system that currently characterize Bangladesh, a rent-free model is practically tough to institute. Thus, the developmental state model is shown to be a practical alternative. As a first step toward achieving this goal, unproductive rent seeking should be transformed into productive one through initiating few minor changes of

190 

M. D. MIAH AND Y. SUZUKI

bureaucratic structure and the judicial system. The national education system should create a pool of talent from which bureaucrats can be picked who would possess enough skills and knowledge to accurately model economic policies. At the same time, judicial independence is highly warranted. We have shown that these changes conform to the dominant strategy of political parties. With this transformation, it is believed that the country can shift to a more efficient structure of property rights system, and hence, accelerate its economic progress.

Index1

A Abdullah, A., 94 Acemoglu, D., 32 Adelman, I., 47 Adnan, S., 49 Aerodynamic, 137 Afghanistan, 60 Africa, 1, 2 Agrarian, 43, 46, 48, 51, 62, 99 Agriculture, 20, 21, 43–52, 54, 62, 72, 89, 93 Agriculture-first strategy, 47, 48 Agro-productivity, 47 Ahmed, 70–72, 75, 79 Iajuddin, 79 Kazi Zafar, 75 Mostaque, 71 Mouded, 75 Samina, 72 Tajuddin, 70, 71 Airport, 120–128

Alauddin, M., 47, 48 Alchian, A. A., 25 Ali, M. (Captain), 71 Ali, S., 47, 55, 91 Altruism, 15 Amjad, R., 90 Amsden, A. H., 30 Anderson, T. L., 26 Anti-corruption bureau, 117 Appellate division (AD), 80, 83, 129n8 Aremu, F., 89 Aristotle, 15 Arrow, K. J., 24 Arthur, L., 48 Asia, 1, 2, 46, 61 Asiatic mode of production, 59 Australia, 11n1 Autocracy, 17 Autorickshaw, 102 Awami League (AL), 70, 71, 73–77, 83, 103–105, 112, 114, 115

 Note: Page numbers followed by ‘n’ refer to notes.

1

© The Author(s) 2018 M. D. Miah, Y. Suzuki, Power, Property Rights, and Economic Development, https://doi.org/10.1007/978-981-13-2763-6

191

192 

INDEX

B Bakht, Z., 52, 54 Balance of power, 6, 32, 139, 177, 188 Bangladesh, 4–10, 41–58, 60–62, 68–85, 89–106, 110–112, 114–118, 121, 123, 125–128, 133, 137, 139–141, 156, 162, 165–169, 188, 189 Agriculture Development Corporation, 102 Air Force, 121 Garment Manufacturers and Exporters Association (BGMEA), 126 Jute Mills Corporation, 102 Telecommunication Regulatory Commission (BTRC), 115 Textile Mills Association (BTMA), 127 Bangladesh Bank, 101, 102 Bangladesh Civil Service (BCS), 81 Bangladesh Nationalist Party (BNP), 71–73, 75–77, 103, 114 Bangladesh Television (BTV), 112 Banking crisis, 101 Bankruptcy, 105, 172 Bardhan, P., 31 Barro, R., 56 Barzel, Y., 4, 24, 25, 132, 135, 136 Bengal, 69, 70, 88, 89, 106 Bengali, 89–91, 116–119, 129n22 Bengali-Muslim, 91 Benson, B. L., 30 Bertocci, P., 76 Bethell, T., 60 Beximco, 95, 96, 101–103 Bhashani, M., 70, 73 Bhutan, 46 Big-push, 43, 51, 54 Bose, S., 69 Bottomless basket, 41

Brazil, 42, 139 British, 8, 69, 70, 82, 84, 88, 89, 105 British East India Company, 88 Budget, 52, 61, 101, 172 Bureaucrats, 72 C Calcutta, 89 Canada, 11n1 Capitalism, 3, 18, 30, 97, 173 Capitalist, 43, 47–50, 59, 62, 90 class, 43, 47–50, 62, 69, 87, 90–92, 182 mode, 14, 24, 58, 59, 141, 144, 188 transition, 42, 48, 77, 85, 162–165, 167–169 Caretaker government, 80, 83, 115, 116, 119, 120, 127 Chaebols, 172–174 Chemical fertilizers, 49 Cheung, S., 24 Chittagong, 94 Clientelist, 92, 99, 100, 189 Coase, R., 5, 22–28, 34, 110, 120, 121, 129n18, 129n25, 135, 138 Coase Theorem, 23, 24, 26, 34 Colonial, 33, 69, 105, 106 hegemony, 69 period, 1, 4, 8, 10, 30, 44, 45, 49, 50, 54, 56, 57, 60, 61, 69, 74, 75, 77, 80, 85, 88, 91, 93, 105, 106, 126, 132, 137, 140 prowess, 33, 69, 75 ruler, 32, 75–77, 106 Commercial, 4, 99, 100, 102, 104, 105, 125, 172, 177 bank, 4, 8, 41, 42, 51, 60, 61, 96, 97, 100–105, 172, 173, 175, 179

 INDEX 

Common-wealth, 17 Communism, 15 Congleton, R. D., 30 Conglomerates, 8, 95, 96, 98, 99, 101, 104, 166, 172, 177 Consumer, 50, 106, 133, 134, 144, 145, 174 price index, 50 surplus, 3, 48, 49, 99, 136, 144 Cooperative, 24, 31 Corporatism, 168 Corruption, 74 Cronyism, 8, 31, 163, 170, 180 D Daewoo, 173, 174 De Alessi, L., 3, 26 Deadweight welfare loss, 142, 162 Deficit, 52 Deficit budget, 52 Deflator, 45 Demand-driven strategy, 50, 51 Democracy, 17, 75–78, 85, 96, 99, 124, 140, 166, 189 Demographic, 133 Demsetz, H., 23, 25, 27, 109, 138 Denationalization, 72, 73, 93, 95–100, 106 Depository financial institutions (DFIs), 94 De-Soto, H., 3 Devolvement financial institutions, 89 Dhaka City Corporation, 115 Dhaka Improvement Trust (DIT), 117, 120 Dhaka Law Report (DLR), 85n3, 128n1, 129n8, 129n19 Dhaka Stock Exchange (DSE), 93, 98 Dhaka Vegetable Oil Industries, 103 Dictator, 10, 76, 77, 81, 117, 170, 178, 180, 181

193

Dictatorial regime, 78, 124, 181 Discrimination, 90, 127 Disequilibrium, 10 Disparity, 2, 53 Divestiture, 93, 97 E East India Company, 88 East Pakistan, 90 Economic, 2, 3, 5, 6, 13, 109, 176 backwardness, 34, 51, 57, 62 blocks, 20, 33, 85, 99 crisis, 30, 31, 33, 68, 70, 73, 76, 77, 81, 85, 87–89, 101, 176, 182, 188 development, 7, 33, 41, 43, 46, 49, 55, 69, 170, 171, 174, 178, 180 growth, 1–10, 30, 33, 34, 41–48, 50, 52–62, 72, 74, 90–94, 105, 117, 167–169, 172, 173, 175, 178–180, 183, 188 institutional, 4–9, 13–15, 22, 25, 28, 30, 33, 47, 52, 58–62, 67, 69, 77, 82, 89, 90, 98, 127, 161–166, 169, 183–184, 188 institutional political, 5, 13–15, 22, 28, 35 neoclassical, 2, 3, 5, 6, 29, 34, 43, 54, 60, 187 organization, 3, 4 reforms, 42, 96, 170, 171, 182 stability, 72, 85 stagnation, 34, 41 Economic Planning Board (EPB), 171 Education, 57, 182, 190 Egalitarian, 51, 132 Ekushey Television (ETV), 111–114, 164 Emission, 110, 162 Entrepreneurs, 88, 90–95, 97, 173

194 

INDEX

Equilibrium, 7, 8, 31, 46, 48, 49, 51, 133, 135, 144–157, 163 Equity, 4, 9, 60, 93, 132, 133, 179 Ershad, H. M., 72–76, 79, 81, 93, 94, 100, 103, 124, 128n6 Ethics, 14, 19, 176 Europe, 57 Evans, P., 131, 132 Everhart, S., 53 Evolutionary, 46, 47 Export, 45, 46, 52, 89, 93, 94, 101, 105, 171–174, 177 Expropriation, 13, 17, 19, 21 Externality, 23, 25, 27, 34, 51, 137 F Faaland, J., 41 Factors of production, 24, 59, 188 Family-based conglomerates, 101 Faruqee, R., 47 Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), 103 Filmer, D., 53, 54 Five-year plans, 171 Foreign, 3, 52, 54, 57, 61, 71, 80, 89, 92–96, 112, 140, 172, 175, 178, 179 borrowers, 94, 172 capital, 41–42, 45, 46, 50, 54–57, 59 exchange, 3, 17, 20, 26, 54, 85, 89, 93, 94, 98, 99, 101, 106, 109–111, 137, 138, 142, 156, 174, 178, 181 treaty, 80 Forests and Environment Ministry, 115 Four-party alliance, 78, 79 Four-stroke CNG, 162 Freedom fighter, 72

Free-riding, 162 Furubotn, E. G., 3, 28 G GDP, per capita, see Gross Domestic Product (GDP), per capita Germany, 2 Gerschenkron, A., 57 Ghana, 46 Glaeser, E., 133 Globalization, 99, 168 Gross Domestic Product (GDP), per capita, 1, 2, 4, 7, 30, 42–46, 49–54, 56, 57, 61, 62, 68, 90, 169, 173 Gross National Product (GNP), 30, 169, 173 H Haber, S., 31, 32 Haggard, S., 170 Hakim, M., 70 Hashim, S., 105 Hasina, Sheikh, 63n1, 74, 80, 85n2 Hayami, Y., 59 Hee, Park Chung, 169, 170 Henderson, D. F., 176 Herbst, J., 33 High Court, The, 84, 113 High Court Division (HD), 122 Hirschman, O., 50 Hobbes, Thomas, 13–18, 22 Hosain, M., 47 Hoshi, T., 179 Hossain, A., 43, 47, 52, 54, 55, 95 Hossain, G., 71–73 Human, 1, 6, 15–20, 22, 26, 46, 50, 54–57, 59, 75, 128n3, 171, 182 Huq, M., 55 Huque, A., 92

 INDEX 

Hydrocarbons, 137 Hydro-electric, 51 Hyundai, 173, 175 I IFIC Bank, 103 Import, 46, 89, 93, 94, 97, 99, 101, 110, 140, 141, 162, 171, 178 quota, 110, 111, 119, 180 substitution, 89, 93, 99, 171 India, 30, 42, 46, 47, 52, 53, 56, 61, 69, 84, 89, 139–141 Indigo, 88 Indonesia, 30 Industrial, 8, 43, 46–50, 54, 58, 69, 88–99, 105, 125, 167, 177, 178 class, 89 contribution, 13, 15, 18, 24, 43, 46, 49, 90, 117, 173, 175 development, 2, 4, 8, 10, 18, 21, 28, 33, 41–49, 51–55, 57–60, 62, 69, 87–89, 91, 96, 97, 102, 105, 116, 118, 124, 166, 168, 169, 171, 175, 177–180, 184, 188 policy, 2, 5, 7–10, 32–34, 35n2, 45, 47, 51, 55, 60, 61, 88, 90–94, 96–99, 106, 172, 175, 178 Industry, 16, 17, 44, 49, 88, 89, 91, 93, 97, 103 Infant mortality rate, 42 Inflation, 44, 45, 72, 131, 132, 172 Institutions, 4, 6, 13, 14, 19, 20, 28–35, 54, 58–62, 67, 73, 74, 81, 88–91, 94, 105, 117, 127, 161–166, 170, 178, 183–184, 188, 189 financial, 45, 60, 74, 89, 91, 94, 101, 102, 105, 133, 139, 141, 172, 177, 180 political, 4–8, 13, 14, 18, 20, 22, 28–34, 42, 52, 59, 60, 62,

195

67–82, 84, 88, 90, 94, 96, 97, 99, 101, 103, 111, 114–120, 124, 125, 127, 128, 134, 138, 140, 143, 163–170, 174–176, 178, 188 International Monetary Fund, 99 Investment, 3, 42, 47, 49, 51–52, 54–55, 59–62, 90, 92, 94–97, 112 Ishi, H., 179 Islam, M., 103 Islam, N., 71 Islam, S. N., 71 Islam, R., 82 Islami Oikya Jote (IOJ), 78 Ispahani, 90, 95, 96 J Jahan, Rounak, 70, 100 Jalal, Ayesha, 69 Jamaat-e-Islami, 76–78 Japan, 10, 11n1, 169, 181–183 Jatio Samajtantrik Dal (JSD), 70 Jatiya, 74–77 Jatiya Party (JP), 74–77 Johnson, C., 172, 175–179 Judiciary, 82, 83 Jute, 88, 89, 95, 101, 102 K Kang, D., 6, 30, 31, 33, 175 Kashyap, A., 179 Kaufman, B., 132 Keidanren, 177 Keiretsu, 177 Kelman, S., 32 Kersey v. City of Atlanta, 120, 123 Khaleda Zia, 74, 77, 115, 127 Khan, M., 29, 34, 48, 52, 88–91, 93–98, 101, 163, 169 Khulna Newspaper Mills, 102

196 

INDEX

Kochanek, S., 78, 90, 91, 93, 95, 117 Korea, Republic of, 2, 30, 52, 56, 57, 89, 110, 169, 177, 178, 180 Kramer, M., 19 Krueger, A., 29, 30 Krusell, P., 29 Kuznets, P., 169 L Labor, 3, 7, 14, 17, 43, 44, 48–50, 54, 55, 58, 62, 70, 169 Laissez-faire, 2, 7, 14, 167 Leadership crisis, 71, 72 Lemos, S., 132 Leviathan, 7, 13, 17–22 Lewis, A., 47–50, 68 LG, 173 Liberal Democratic Party (LDP), 175 Liberal market consensus, 7 Liquidity, 110 Loan, 8, 100–105, 166, 172, 173, 175 Locke, John, 18–20, 22 Lockwood, W., 177 M MacPherson, C, 18 Macroeconomic, 44, 45 Maddison, A., 1 Maldives, the, 46 Maniruzzaman, T., 72 Mankiw, N., 56 Marginal productivity of capital, 52, 56 productivity of labor, 48 social benefit, 26, 111, 141 social cost, 121, 141, 164 Market-oriented analysis, 109 Marx, Karl, 50, 58, 59 Marxism, 70

Masdar Hossain, 81, 83 McChesne, F., 28 McKeon, R, 18 Meiji, 176 Mexico, 2, 31 Middle-income country, 6 Migdal, J., 33, 34, 68, 166 Milgrom, P., 24, 25 Ministry of agriculture, 72 communication (MoC), 140 finance, 81, 83, 171, 172, 178, 179 information, 112, 113 justice, 171 trade and industry, 171 Ministry of International Tarade and Industry (MITI), 178, 179 Mollah, M. A., 92 Momen, M., 97 Monarchy, 17 Monbiot, George, 35n2 Monetary policy, 172 Monopoly, 35, 88, 112, 129n12, 140–142, 145, 156, 162, 164, 165, 170 Mozumder, P, 54 Mughal Emperor, 88 Mughal Empire, 88 Muhith, A. M. A., 52 Mujib, Sheikh Mujibur Rahman, 70, 71, 74, 84, 92 Mukti Juddah Songsad, 70 N National Awami Party, 70 Natural gas-run vehicle (NGV), 139 Navissi, F., 4, 132, 133 Negative-sum game, 27 Nelson, R., 3 Nepal, 61 Netherlands, 132, 133

 INDEX 

Neutral caretaker government (NCG), 77 NGOs, 140 Nigeria, 4 Nillesen, P., 132, 133 Nixon, R., 135 Non-farm products, 46 Non-market distribution, 9, 109, 111, 128, 162, 164, 189 Non-market mechanism, 9, 109–111, 127 Non-performing loans (NPLs), 101 Non-price mechanism, see Non-market distribution North, D., 3, 6, 41 Nozick, Robert, 18 Nurkse, Ragnar, 51, 52 Nuruzzaman, L., 94 O O’Driscoll, G. P., 2 Oklahoma land rush, 110 Okuno-Fujiwara, M., 6, 175 Olsen, E. O., 132 Olson, M., 138 Oriental Bank, 103, 105 Osmani, S., 51 Ownership, 4, 15, 24–25, 27, 94, 97–98, 100, 144, 188 P Pakistan, 45, 61, 69, 75, 82, 87–91, 95, 96, 99, 106, 139 Palmer-Jones, R, 47 Papanek, G., 89 ‘Patron-client’ network, 8, 87–106, 163, 167 Patron-client politics, see ‘Patron-­ client’ network Pejovich, S, 28 Pempel, T., 176, 179

197

Pessimistic, 20 Petrobangla, 139 Philippines, 31, 53, 54, 181 Philosophy, 13, 68, 85 Plaintiff, 81, 111, 118, 120–126 Pollutant, 137, 162 Population, 42–53, 55–57, 61, 68, 84, 98, 141, 156, 166, 183 Portfolios, 85, 96 Posner, R. A., 5 Postcommunist countries, 3 Poverty, 45, 52 PricewaterhouseCoopers (PWC), 4 Prime minister, 119 Prisoner’s dilemma, 168 Private property, 3, 7, 14–22, 29, 32, 69 Privatization, see Denationalization Procedural right, 183 Productivity, 46–49, 51, 52, 55, 56, 59, 92, 183, 184 Property right, 3–8, 13–15, 17, 20–29, 34, 69, 162, 163, 187, 188 Prothom Alo, 63n3 Public domain, 9, 25, 131, 134–136, 144–155 Purchasing power parity (PPP), 4, 45 R Radio spectrum, 110 Rahman, A., 74 Rahman, General Ziaur, 71–74, 77, 92, 93, 100, 103 Rahman, M., 52, 54, 74 Rajdhani Unnyan Kartipakkha, 116–119 Rajuk, see Rajdhani Unnyan Kartipakkha Raymon, N., 134 Refueling station, 142–145 Religion, 135

198 

INDEX

Rent, 6, 9, 10, 29–33, 69, 87, 111, 120, 128, 132, 133, 135, 164–169, 175, 181, 189 Rent dissipation, 136 Rent-seeking, 10, 29–34, 87, 99, 109–111, 114, 116, 120, 125–128, 164–168, 175, 180, 181, 183, 184, 189 Riaz, Ali, 83, 84 Richardson, C., 4, 176 Rickshaw, 146 Right to property, see Property right Riker, W, 29 Roh, Tae Woo, 175 Rosenstein-Rodan, P. N., 51 Rousseau, Jean Jacques, 13–15, 20–22 Rupantarita prakritik gas company limited (RPGCL), 139 Rural-urban income disparity, 53 Russia, 42 S Saad, H., 124 Sabet, D, 116 Sachs, J., 42 Salant, D, 110 Samsung, 173 Samurai, 176, 182 Sarker, A., 92 Sened, I, 29 Seoul, 172 Serajul, I., 90–94 Shinepukur Holdings Ltd, 101 Shoesmith, B, 115 Shomokal, 129n22 Shortage, 132, 133, 135, 136, 144, 162 Singapore, 2, 10, 110, 169 Sinha, S. K., 84, 100 Smith, A., 132 Sobhan, R., 89, 97

Socialist state, 70 Solow, Robert, 55–57 Sonali Bank, 102, 103 Soviet Union, 57 Sramik League, 70 Sreenivasan, G, 18 Sri Lanka, 46, 61 State-owned enterprises (SOEs), 72, 91, 99 Stevens, J, 18 Stiglitz, J. E, 29 Stock exchange, 93, 98 Stockwin, J., 176 Subsidy, 89 Subsistence, 14, 19–21, 48, 50, 62 Suharto, 30 Supply, 17, 21, 54, 109, 133, 135, 136, 141–157 Supreme court, 78, 80–84, 111–114, 118, 120–124, 171 Suzuki, Y., 101, 132 Swiss Bank, 61 T Taiwan, 2, 10, 169 Tajikistan, 57 Tariffs, 99 Taxation, 32, 68, 74, 92, 94, 115, 131, 178–180 Taxi-cab, 145, 146 Terrestrial, 111–114 Three-wheeler, 137, 139, 140 Tokugawa, 176 Tokyo, 176 Tornell, A, 31 Transaction cost, 5, 7, 10, 22–25, 27, 28, 34, 35, 162 Transparency international Bangladesh (TIB), 116, 157n2 Tu, Young, 110 Tullock, R, 29, 30, 111 Turkey, 30

 INDEX 

U Uddin, S., 92, 94, 97 UK, see United Kingdom Ukraine, 57 Ulen, T., 5 Uncertainty, 8, 17, 117, 132, 165 United Kingdom (UK), 2 United States (US), 2 Unproductive, 4, 29, 87, 111, 127, 165, 168, 184, 189 V Vietnam, 4 Vishny, R, 31 Vogel, S., 47 W Wage, 47–51, 92, 132 Waldron, J, 18

199

Waqf, 123 West Pakistan, 90 Williamson, O, 24 Woo-Cumings, M, 30 World Bank (WB), 4, 41, 42, 51, 60, 96, 99, 137 World Health Organization, 137 Y Yamamura, K., 178 Yonhap Steel, 173 Yoon, D., 171 Z Zaibatsu, 177 Zaikai, 177 Zambia, 46, 57 Zamindar, 69 Zimbabwean, 4