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Making our institutions work

Making our institutions work
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First Published: Tue, Dec 15 2009. 12 33 AM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Tue, Dec 15 2009. 12 33 AM IST
Markets propel growth. Therefore, markets are good. But markets without institutions to guide them are not. When markets move ahead of institutional capabilities, economies become unequal and unstable. The world has learnt this lesson again in the recent financial and economic crisis. Therefore, reforms to enlarge markets with private capital, property rights and free trade must always go hand-in-hand with the building of requisite institutions, as Dani Rodrik reminds policymakers in One Economics, Many Recipes: Globalization, Institutions, and Economic Growth.
The question before policymakers in developing countries is no longer whether institutions matter, but which institutions matter and how does one acquire them. Firstly, “institutions”, as Douglass North and others have pointed out, are not merely “organizations” such as commissions and ministries. More broadly, they are processes, behaviour rules and norms that enable societies to function. Secondly, institutions that countries need for their development are not static houses in which they live but moving vehicles in which they get from point A, where they are, to point B, the goal of their progress.
Illustration: Jayachandran / Mint
While the principles which the Washington Consensus propounded —free markets, private capital, property rights, financial stability and so on—may be universally desired outcomes—it failed in presuming that there could be a standard blueprint of institutions for getting there. Point B, the goal of development, may be the same for all countries, but point A is not. Starting points depend on economic endowments as well as social and political conditions. Therefore, countries must follow different paths, and they may require different vehicles (institutions) appropriate for their needs. Moreover, institutions must evolve and change to fit the stage of the journey. The institutional capabilities the US required 150 years ago are not those it needs now. Similarly, the institutional capabilities China will need to sustain social, political and economic stability are not the ones it required to start its economic growth 25 years ago.
India must develop institutional capabilities to accelerate inclusive and sustainable growth that fit its own needs. Therefore, the meta-institutional capability that it needs, as do all countries, is the ability to learn and to evolve its own institutions and policies. It must feel the stones under its own feet while crossing the river, to use a Chinese expression, and thereby know the reality it stands on and sense what may be ahead.
Industrial policy
Consider industrial policy. The task of shaping industrial policy is to elicit information on significant externalities and their remedies. As it advances and grows, the productive sector bumps into the constraints in the economy: It feels the stones underfoot, or the “pinch in the shoe”. The lesson from Asian countries that have rapidly grown strong industries in the last century is that policymakers must work closely with industrial managers to solve problems in the production sphere. In Japan, MITI and the Keinderan worked together; in Korea, government and the chaebol; in China, the party and state-controlled enterprises. In its own way, each produced an institutionalized process of collaboration that created policies resulting in competitive industries.
In a world in which not only companies, but states and countries, too, are rated on their competitiveness by international agencies, and one in which all must strive to climb that scale, the only sustainable source of competitive advantage can be a company’s or country’s ability to learn, change and improve faster than any potential competition. Therefore, a country’s competitive ability lies in the capability of the collaborative process between producers and pol-icymakers to produce effective policies and not on any particular policy.
India cannot copy the collaborative process used by China, Korea or Japan. Its circumstances are different and times have changed. Those countries may have set aside labour rights and environmental concerns— by today’s standards—in their pursuit of industrial growth. India in the 21st century must not. Moreover, those countries protected and promoted domestic companies. Again, 21st-century India may not. Nevertheless, Indian policymakers must improve competitiveness and growth of industry. The processes that will enable them to do so will include consultations not only with large domestic companies, which has characterized the Asian giants so far. The consultations must involve those who represent labour rights, land owners and concerns for the environment; also, small-scale industries that generate more employment and thus more “inclusive” growth; and even foreign companies whose investments and technologies can help India.
India has to innovatively create a process for consultation and consensus-building that works well and fast. It is to the design and development of this process that policymakers and stakeholders in the country’s progress must apply themselves if they wish to find policies that will propel inclusive and sustainable industrial growth in India. Should India succeed, as it must, the description of that process (which will be different to China’s and the others) and the policies that it will produce (which cannot be known ex ante) will be added by future economic historians to their list of successes in economic development.
Soft infrastructure
India has to catch up with China to provide industry the hard infrastructure needed to improve competitiveness: roads, ports, railways and so on.
As Indian industries grow, and as productivity of its agriculture improves, urbanization will accelerate. It is expected that, over the next 25 years, another 300 million people will be added to the 300 million now living in our towns and cities. They will further strain the creaking urban infrastructure. More than roads and flyovers, the infrastructure these millions will need, most of whom will not own cars, is basic services of water, sanitation, sewerage, decent housing and electricity. It is estimated that Rs300,000 crore per year will be required over the next 20 years to provide these services.
The government will be very hard put to budget so much money. Private capital will have to be attracted. Therefore, there must be markets for such services, and people must be willing to pay what they cost. Since simplistic schemes of privatization have not worked, even in developed countries, innovative ways to introduce market ideas into the provision of basic urban services must be found, and into universal education and healthcare, too. Here too, as in industrial policy, the path of change must be discovered by consultations between the principal stakeholders.
The challenge in “public-private partnerships” is often seen, too narrowly, as the framing of good and legally enforceable contracts between government agencies and private business interests. Whereas for the contracts to be socially and politically acceptable, there must be consultation with the people involved too, a lesson learnt in the drive to create special economic zones in India that began to stall. The conclusion is that framing of industrial and urban policies, also the building of “hard” industrial and urban infrastructure, require good processes for consultation and consensus amongst the key constituents of society involved.
The most successful corporations know that a clever strategy is useless unless it can be implemented. Therefore, they focus on the processes of transformation and change management, to which they apply the best available techniques and tools. In a democratic society, the language of inclusion and equity must be spoken along with the language of efficiency, engineering and economics. Economists and engineers have the expertise to design economically viable policies and the hard infrastructure that countries need. The soft infrastructure requires expertise in processes of change and societal learning. It is imperative for India to be the world’s master at these processes. This imperative has to be converted into plans and actions to develop, acquire and apply tools and expertise for these processes. Such schemes must be at the core of India’s strategy for more rapid, more inclusive and more sustainable growth.
Arun Maira is a member of the Planning Commission. Comment at theirview@livemint.com
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First Published: Tue, Dec 15 2009. 12 33 AM IST