Institutions: Independent Decay or Decaying Independence?

In the present decade, we have seen an unprecedented amount of writing on the decay of institutions worldwide – whether it is the media or the courts or the legislatures. – from New Delhi to the Washington, from Brussels to Westminster. Commentators and critics lament the hollowing out of institutions that had been presumed to be bedrocks of constitutional democracy especially after World War II. The inability of these structures to stem the tide of illiberal, personalized, cult-based governments has evinced some surprise, even introspection, in the promoters of liberal democracy.

Newspaper columns, essays, editorials and even some books are filled with historical analysis of institutions – their origins, their structures, their functions and their present decay. Most of this is quite convincing and seemingly accurate. But they only present a part of the story. A lot of commentary presumes institutions as stand-alone setups that function above the dynamic of everyday politics. For example, the Election Commission of India was assumed to be an ‘apolitical’ for long time. Now, the liberal intelligentsia in India find that adjective to be false.

Similarly, prominent commentators have time and time again cast the personal shortcomings of some institutional leaders as exceptions. For example, the former Chief Justice of India Deepak Mishra was seen as an aberration who would be repaired over by his successor, Justice Ranjan Gogoi. Many editorials who praised him while he was CJI in waiting now have much to complain about him. Moreover, suddenly the Supreme Court of India looks like a palace of intrigue.

On the other hand, the former RBI governor Raghuram Rajan was a darling of the liberals as much for his policy decisions as his comments on socio-political issues. RBI, it seemed during his tenure, could do no wrong. His successor Urjit Patel, who was initially seen as a timid bureaucrat, suddenly found himself being praised for standing upto the incumbent government. His successor Shaktikanta Das has had no such turn in fortune.

It would seem from these example and those from around the world that the persons leading the institutions are just as important as the artifice of the institutions themselves. That is certainly true. However, the political dynamics and ideological contests that surround institutions are just as important, and often ignored by commentators. Do institutions matter? Yes, they do. But people that lead them and their ideas matter just as much.

Take the example of the ECI. The lament of its ‘decay’ from a strong force of impartiality to its shortcomings in the present sometimes conveniently forgets the political struggle that created its strength – under the leadership of T. N. Sheshan, the support of Supreme Court and popular belief in ECI’s newly acquired powers to ensure free and fair elections. It did not stop there, there was a change in the lexicon of Indian electoral democracy – Model Code of Conduct, which had to be adhered to no matter what. What we have failed to appreciate while this became the norm is that it was not an event, but a dynamic process that brought us to a place where out expectations from ECI had changed – it was and continues to be a struggle to keep the elections free and fair. ECI does not exist outside the realm of everyday politics. Its officers are not objective robots but subjective bureaucrats. It is not an independent, autonomous body but an inter-dependent, constrained institution that depends as much on the courts and popular support as it does on the some of the very people it is supposed to keep in check – the powerful leaders in government.

Similarly, the Supreme Court of India is a case in point. It would appear from commentary that the SC has suddenly taken a turn towards decay. Presumably, it was a fine institution earlier. What this ignores is that the roots of today’s decay lie precisely in the fineness of the court in the preceding period. This was underlined by an unprecedented power-grab by the court – to appoint its own members, justified by the inability of Indian politicians to be sensible and popular resentment against them. While the ‘collegium’ temporarily solved some problems, it created a facade of independent judiciary without oversight by the people’s representatives. Today, the same independence that was applauded and institutionalized has created a situation where a sitting judge can be a judge in his own case without the slightest bit of irony. Not just that, it has created a situation where the political executive can exploit these gaps and shortcomings to its advantage while preaching the rhetoric of judicial independence when suitable.

The example of RBI is even more baffling. While a major headliner in the limited reaches of the financial press, the RBI Governor wasn’t a figure of media commentary until Raghuram Rajan became the Governor. And suddenly the person holding the post has become a thing of daily news. However, the previous ignorance and the recent stardom of the RBI fails to capture the institution of India’s central bank in its entirety. While 1991 liberalization is seen as a major step in opening India to global trade, its role in changing RBI’s functions is only mentioned in passing. Moreover, the changed financial market landscape in which RBI functions today means that its institutional dynamic with the government with the central governments is vastly different from what it was two or three decades ago. At the same time, the ideological bent of Indian economists and financial commentators has changed – the institutional expectation from RBI is therefore not the same. At the same time, the role of political executive has been made more prominent via the monetary policy committee (MPC) – away from the singular role of the Governor in monetary policy. But that is not all that RBI does. In a globalized and digitized financial landscape, there is a struggle between government and the RBI for jurisdiction over emerging arenas. This makes the RBI board and the RBI Act important structures – both of which remained outside common public discourse until recently.

These examples should suggest that institutions are neither autonomous nor independent. Neither should we want them to be. They are dependent – on their leaders, on other institutions, on people, on ideas, on precedents, on political dynamics and on many other things. To narrow them down to just their leaders or just their independence is both disingenuous and naive. They reflect a tenuous social contract that emerges after every small struggle for power and for ideas – one that happens at all times and that is shaped by a variety of potent forces that make the adjectives ‘autonomous’ and ‘independent’ seem childish and hollow.

India: Regional Disparity in Growth (#2)

First Post – India: Regional Disparity in Growth (#1)

COMMENTS ON ECONOMIC LITERATURE

  • Solow-Swan Model: (hereafter, SS model):

According to this, due to diminishing returns to capital, poorer regions which have short supply of capital, should exhibit higher marginal rates of return on investment than richer regions which have larger capital, and hence higher capital-output ratio. Hence, for any given rate of investment, the growth rate of a region with lower per capita output tends to grow faster than the region with a higher per capita output. This convergence is sometimes known as the “catch up” hypothesis.

However, this convergence was not found to take place in India. There is a positive, instead of negative (as suggested by SS model), correlation between initial per capita output and subsequent growth rate across states. Private investment is also found to be distributed disproportionately in favour of the richer states, thereby contradicting the expectation from SS model. Even within states, there is a tendency to concentrate industrial and infrastructural projects in more developed, urban and metropolitan areas.

Bakshi et al (2011) categorically state that ‘regional backwardness in India is a moving frontier with the most intense forms of poverty and deprivation getting increasingly concentrated within enclaves of backwardness’.

  • Barro and Sala-i-Martin regression model:

These concepts relate to beta (β)-convergence and sigma (σ)-convergence. σ-convergence means that the per-capita income of poor regions become less disperse compared to that of richer regions. The concept of β-convergence suggests that poorer regions tend to grow faster than the richer ones and are hence able to catch up with them in the long run.

σ-convergence is elusive because we find that there is increasing polarisation between the rich and poor states over the decades. β-convergence is also unseen as the growth rate of per-capita income has also been high in richer states. Off late, however, some poor and slow states like Bihar, Uttar Pradesh and Assam have sped up considerably compared to their richer counterparts.H

  • Harrod-Domar Model:

It explains economic growth in terms of savings rate and capital–output ratio. High level of individual savings are channelized into productive investments leading to greater output of goods and services. Similarly, with a decrease in capital–output ratio, more output is produced with fewer inputs.

This model seems to better explain the regional diversity in growth with both its variables being favourable for high per-capita income states. Capital output ratio has been skewed against backward regions as locational controls and programmes to promote industries in these areas have been gradually withdrawn to promote freer markets and global participation. Furthermore, capital is more mobile than labor, especially unskilled labor – which is more common in poor regions, which further exacerbates these differences. Since marginal propensity to save (MPS) is greater for relatively well-off states, they have higher savings rate – a determinant for private investment.

Williamson (1965) suggests the bias in favour of rich regions in licensing and tariff policy, the major instrument of planning and control, reverses once a threshold of national development is reached. However, it seems this threshold was never reached in India as the concentration of factories and PSUs in rich states suggest. Post-liberalization market forces reinforced this disparity in terms of investment. Hence, the spread effects of technical and social change and income multipliers have only slowly trickled down. Hence, widespread polarisation in terms of economic and social development has been observed.

  • Myrdal’s Spread and Backwash Effect:

Backwash effect suggests that if an area in a country starts growing, it causes labor and capital (much more mobile than labor) from other parts of the country to gravitate towards this growing centre. Spread suggests the opposite that growth in one place, spreads to its suburbs and all the adjoining areas.

In India, it appears that backwash effects have largely predominated the spread effects. While satellite cities around centers like New Delhi, Kolkata, Mumbai, Bangalore, Hyderabad, Chandigarh, Ahmedabad etc. suggest spread effect has taken place. However, the gravitation of skilled labor migration and public as well as private investment in such narrow pockets show that agglomeration overshadows the positive spillovers. To begin with, the choice of these cities are affected by the distribution of natural resources, availability of health, education and transport facilities, access to major markets including foreign markets, distribution of inherited know-how and labor skills.

While distribution of natural resources is an important factor, access to market and capital seems to be much more significant as we find that the mineral-rich states like Jharkhand, Chhattisgarh, Orissa etc are still largely poor. On the other hand, coastal cities with access to ports and centers with access to financial capital have grown along with their neighbouring regions. It’s easy to see how this occurs. Capital rich industrial centers connect to their sources of cheap inputs and markets through roads, railways and ports. Subsidiary industries connected to the main industry also set up in the same region for ease of transportation, and thus a whole set of industries emerge in one hub. While the center spreads, this spread is limited to a small radius. In India, we also see a growth in the settlements of migrants from poor areas, dependent on daily wages, in and around these pockets.

The growth of manufacturing sector since the 1990s has been concentrated in a few developed states and large cities as the locational controls and programmes to promote industries in backward regions have been gradually withdrawn. This has accentuated the interstate and intrastate disparity in industrial development. (Gupta & Kundu, 1996)

An interesting new study (Chakravarty & Dahejia, 2016) correlates luminosity and state GDP. 380 of the 387 districts in the twelve most populous states (~ 85% population) are on average just one-fifth as bright as the metro cities of Mumbai and Bangalore at night. Even excluding the metros, 90% of all districts are just one-third as bright in the night as the top 10% of all districts. It also finds that this ratio is only worsening between 1992 and 2013.

A high initial share of agriculture seems to lead to relatively lower growth subsequently. The initially poor-and slow- growing states which had agriculture shares above the national average had, by 2004, significantly reduced their dependence on agriculture, to levels well below the previous average. In Bihar, in particular, the shift away from agriculture has continued in more recent years. (Ghate & Wright, 2013)

However, this may not necessarily be a positive development in terms of regional equity because this share has not gone to manufacturing sector either, while the growth has been significant. This growth may have concentrated in the capital cities and mainly in service sector, hence accentuating intra-state disparities.

Ironically, many economists, including in the Planning Commission (Second Five-Year Planning) felt that the objective of reducing inter-regional inequality can have an adverse bearing on the national output by curtailing efficiency and can even exacerbate the said inequality. Consequently, they suggested that goals of regional development and parity could be focused on when the national cake has grown sufficiently and when such an exercise will not significantly hamper economic progress.

Contrary to the aforesaid concerns, some economists felt that greater regional equity as a goal was essential for rapid growth. The logic of delayed profitability involving time-preference was central to these arguments. From the improvement and convergence in health and literacy figures across states, it seems that the logic of delayed profitability has indeed been realised in these sectors, disparity is still considerable.

While the rhetoric of ‘development of weaker states’ has been a constant feature of Indian politics, it has always been sacrificed at the altar of national growth focussed on growing the pie to divide it more equitably in a supposedly distant future. Planning for regional imbalance has been at best weak and at worst negligent and negligible (Bhagwati, 1970). Reduction of regional disparities had not been considered important enough as the recommendations of the successive Finance Commissions, except Fifth, are not in line with this objective (Reddy, 1972)

Third Post – India: Regional Disparity in Growth (#3)