Trust Indians, it will spur India’s growth3 min read . Updated: 09 Mar 2016, 12:28 PM IST
Investing in social capital is important for building an entrepreneurial state
It was not surprising that Prime Minister Narendra Modi’s reply last Thursday to the motion of thanks to the President’s address in the Lok Sabha received attention mostly for the jibes he took at Rahul Gandhi, the vice-president of the Congress party. His other important points went largely unnoticed.
For instance, towards the end of his intervention, Modi said: “In a democracy like India, we cannot leave the citizens to officialdom. We need to trust 1.25 billion Indians." Modi recounted a few of the steps the government has already taken in this regard, such as discontinuing the practice of interviews for junior government jobs, allowing for self-attestation of documents and extending the benefit of the presumptive taxation scheme to small businesses with turnover less than ₹ 2 crore.
As Modi himself admitted, these steps are not spectacular in nature, but they impinge upon an important aspect of the psychology of governance and policymaking. Lack of trust or social capital imposes disproportionate costs on the regulatory and policing arms of the state. The lower the trust, the higher is the demand for regulation, and consequently the more inefficient is the resource allocation, invariably leading to sub-optimal outcomes.
A 2009 paper titled Regulation and Distrust by Philippe Aghion, Yann Algan, Pierre Cahuc and Andrei Shleifer is relevant in this context. The researchers find a strong negative correlation between government regulation and social capital. Investment in social capital, the finding goes, “leads to civicness, low regulation and high levels of entrepreneurial activity". In contrast, distrust leads to greater control of the economy by the government.
The picture for India is especially worrisome. For its level of distrust, India had—compared to the global mean—a greater number of regulations governing entry of businesses, less freedom for firms in setting prices and more rigidity in regulation of labour markets. The caveat: the comparison is based on data spanning 2002-04. Another paper by Aghion, Algan and Cahuc in 2008 established that the regulation of minimum wages—partly stemming from mistrust, or an assumption of mistrust, between an employee and her employer—“crowds out the possibility for workers to experiment [with] negotiation and learn about the true cooperative nature of participants in the labour market".
The problem in the Indian context was neatly summed up by Pratap Bhanu Mehta in an article for The Indian Express in 2014: “There is no point lamenting the absence of a genuinely liberal impulse in our politics if society is rife with mistrust. The point of more regulation is not to achieve particular objectives; it is to sublimate our distrust of each other." The exaltation of government, he added, was a deeply psychological one, not merely an ideological position.
Investment in social capital can bring massive gains in corporate environments as well. In an article titled Berkshire Hathaway: The Role of Trust in Governance, David F. Larcker and Brian Tayan explain how managers at Berkshire Hathaway—headed by globally celebrated investor Warren Buffett—are trusted entirely on operational matters and are imposed with hardly any oversight. The vice-chairman at the company, Charlie Munger, calls the Berkshire Hathaway system “delegation just short of abdication".
The dilemma on delegation or decentralization is all pervasive: it spans public and private, corporations and governments. Avuncular concerns over the quality of expenditure by state and local governments have long been arguments against devolution of greater funds by the central government. This is a misconceived apprehension as states have been better at curtailing fiscal deficits than the central government. A similar patronising mindset is revealed in the debate on cash transfer. It is argued that the poor will squander the money on liquor and drugs—a conjecture not supported by data.
Social trust among citizens and between the government and citizens is helpful for reducing regulatory cholesterol and promoting entrepreneurship. In a 2006 paper titled Social Cohesion, Institutions, and Growth, William Easterly, Jozef Ritzan and Michael Woolcock conclude that “pro-development policies are comparatively rare in the developing world, less because of the moral fibre of politicians (though that surely matters) than because of insufficient social cohesion that impedes the construction of effective institutions (and thereby narrows a given policymaker’s room for manoeuvre)".
Modi should be credited for recognizing the importance of trust. If this recognition is translated into widespread application, the government’s initiatives like Start-up India and Make in India will be immensely helped.
Is low trust in Indian society responsible for the regulatory overload of the Indian state? Tell us at firstname.lastname@example.org