Rents and regulations in the developing world

Abstract

Regulations may end up harming the very people they are intended to protect, and an unexpected windfall may lead to upheaval rather than prosperity. In three chapters, I discuss how rents and regulations can affect lives and welfare in the developing world. In the first chapter, I examine employment protection legislation (EPL), which is intended to promote security for workers by placing restrictions on firing. Using India as a setting, I argue that EPL shifts jobs from the young to older workers. The identification strategy is based on Rajan and Zingales (1998), and relies on heterogeneity between manufacturing sectors. The impact of EPL is strongest in those manufacturing sectors where international evidence suggests employers most like to fire workers. Finally, I present suggestive evidence that the shift from young to old employment induced by EPL reduces total factor productivity of plants. The second chapter, coauthored with Eric Werker, demonstrates how rents slow down productivity growth. The negative effect is strongest in poor countries, suggesting that high profits stymie economic development rather than enable it. Consistent with the rent-seeking mechanism of our theory, we find that high rents are associated with a slower reduction in tariffs. We also provide evidence that a country's average mark-up in manufacturing is a strong negative predictor of future economic growth. The third and final chapter, which is based on joint work with Faisal Ahmed and Eric Werker, examines foreign aid and oil rents in the Middle East. Aid from oil-rich autocrats created unearned rents for many developing countries in the 1970s. We provide a theoretical explanation for this phenomenon, whereby autocrats experiencing a windfall in unearned income may find it optimal to donate some of it to other countries in order to make their own state a less attractive prize to potential insurgents.