Coasian bargaining

ARTICLE: Dear Readers, Eid Mubarak!

And the return of the lockdown!

Notwithstanding that the Government's strategy seems to be working, months of inactivity, lack of physical movement at least (no golf topping the list) has allowed laziness to sneak in. And notwithstanding that the "To Read" piles of articles, publications, and books keep growing, there is still a silver lining - better late than never.

The interview of Dr Asim Khwaja with Moiz Ur Rehman made the rounds on social media about a week ago, with the usual suspects hailing it as a win for free markets - which trumpeting, now after having read the interview, reeks of a confirmation bias. Hang on, guys, read it again! For the record, the interview was published in our very own BR. Words from the sponsor - kindly procure the 19 July 2020 edition of BR or subscribe on our website to read the interview in entirety.

Whilst his views on productivity and protectionism were interesting to learn from, and may even be taken up in a subsequent piece, what caught the eye more was the Coasian Bargain he proposes- and that too not because of the Bargain itself, but the preamble to the example he gives.

Only someone not dependent for his livelihood in Pakistan and not residing in Pakistan can perhaps call a spade a spade thusly. The extract reproduced below is from the interview verbatim and may not necessarily be the view of this columnist, this newspaper, or the entire electronic media in this country:

"For instance, a feudal landlord with a lot of land under them may be quite unproductive. You need to convince them that their asset needs to be developed; the question then arises of how should we develop it? Imagine if you own large relatively infertile land. In such a case it may be the value derived from this land is not what it produces but the fact that there are a lot of dependent tenant farmers on their lands. These "mazaras" may not be very productive, but, by casting their votes in the landlord's favour, they could help him gain political power, which he could then, in turn, use for gaining more rents. In this case, you don't get productivity from your land itself, but instead, it becomes a source of indentured/desperate people who then become votes and these votes transform into power for the landlord. In that context, you will never invest in your mazaras' education or health because if you invest in them, they may no longer be dependent on you" Dr Asim Khwaja.

Enough said - albeit the Coasian Bargain he suggests in this case, in my opinion, is a non-starter. He may understand the economics of the situation - but in my opinion, at least not fully, the game of power. If you think about the paragraph, whether you like it or not, in our case, democracy is not the solution - nor the revenge, for that matter; if at all, democracy is a willing abettor.

For those of you who are wondering, a gentleman named Ronald Coase came up with a theory in 1960 that if trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome, regardless of the initial allocation of property. In practice, obstacles to bargaining or poorly defined property rights can prevent Coasean bargaining (courtesy Wikipedia).

The above definition highlights another important point which this column highlighted in four successive write ups quite recently: poorly defined property rights. It would be interesting to know how much of the land holding is unproductively held by the feudal landlords, how much of the land is disputed, whether being contested in the courts or not, and on a personal note how much of agricultural land has been consumed by real estate development - and then perhaps we can have a more useful debate on productivity.

Except that let's not forget that the above mentioned elected representatives are also responsible for legislation necessary for swift resolution of property cases.

And, Dear Dr. Sahib, fully agree with you that you simply can't have a policeman who no one polices, and that we need to have checks and balances everywhere - including on the people who impose checks and balances. And whilst police reforms, in my view, are the other key impediment to economic growth of Pakistan, kindly advise us on how to bell the cat!

And not to worry, sitting where you are, outside Pakistan, you need not worry about the landlords, the land mafia, and the powerful.

Dear Readers, my apology for reverting back to these two issues again and again, property rights and contract enforcement, which even I agree seem pretty boring reading the second time around; but the hope is that, repeated sufficiently, someone who can do something will read and react.

Or, at the minimum, I should get a lifafa shortly!

In the end, I propose to agree to disagree with Dr Sahib; the solution does not lie in Coasian Bargaining!

(The writer is a chartered accountant based in Islamabad. Email: [email protected]. The views expressed in this article are personal. The views are not necessarily those of the newspaper)

Copyright Business Recorder, 2020