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Some Economic Consequences of India's Institutions of Governance: A Conceptual Framework

Some Economic Consequences of India's Institutions of Governance: A Conceptual Framework Nirvikar Singh + Department of Economics University of California, Santa Cruz Santa Cruz, CA 95064, USA Revised
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Some Economic Consequences of India's Institutions of Governance: A Conceptual Framework Nirvikar Singh + Department of Economics University of California, Santa Cruz Santa Cruz, CA 95064, USA Revised December 2003 Abstract This paper examines the functioning of some of India s institutions of governance, namely, the legislative and executive branches of government, the judiciary, and the bureaucracy, from an instrumental, economic perspective. Governance is analyzed along three dimensions: (1) the degree of commitment or durability of laws and rules, (2) the degree of enforcement of these laws, and (3) the degree of decentralization of jurisdictions with respect to local public goods. It is suggested that India's experience of governance reflects insufficiencies in all three dimensions: of durability, enforcement, and decentralization, with adverse consequences for economic efficiency. The paper concludes with a brief normative discussion of collective action in general, and alternative structures of institutions of governance. JEL codes: H11, K00 Keywords: governance, commitment, durability, enforcement, decentralization This is a substantially revised version of a paper prepared for the International Law and Economics Conference, New Delhi, sponsored by Project LARGE. I am grateful for the comments of my discussant on that occasion, Marc Galanter, whose own work in this area has been so significant. I am also grateful to Dilip Mookherjee for detailed comments on an early draft, and to Bibek Debroy, Donald Wittman and Daniel Friedman for helpful conversations and comments. I have benefited most from the critical comments of several anonymous referees. They are blameless for the shortcomings that no doubt remain in my arguments. + Phone: (831) , Fax: (831) , Some Economic Consequences of India's Institutions of Governance: A Conceptual Framework 1 Introduction Two recent historical developments seem to have brought issues of governance into prominence. One is the economic failure and collapse of the Soviet-style regimes, the other is the unprecedented rapid economic growth witnessed in East Asia. India, while not a direct participant in either change, has been affected by both, and debates that have gone on since the 1960s about India's economic and political direction have been taken up with renewed vigor. The perceived triumph of the market has helped lead to the sharpest changes in Indian economic policies since independence, and focused attention, as in the rest of the world, on the actual as well as the proper role and functioning of government. Given this background, this paper examines the functioning of India's institutions of governance. We use the term governance more broadly than some economists. Oliver Williamson, following Davis and North, for example, distinguishes between the institutional environment ( the set of fundamental political, social, and legal ground rules ) and institutions of governance ( arrangements between economic units that govern the ways in which these units can cooperate and/or compete ). 1 However, this distinction is hard to draw in practice, and the institutional environment in India is intertwined with governance. Specifically, we focus attention on some aspects of the legislative and executive branches of government, the judiciary, 1 See Oliver Williamson, The Institutions and Governance of Economic Development and Reform, Proceedings of the World Bank Annual Conference on Development Economics (1994), pp , and Lance E. Davis and Douglass C. North, Institutional Change and American Economic Growth (Cambridge: Cambridge University Press, 1971). Robert Putnam, in commenting on Williamson, gives a more concise definition of governance in this sense: the organizational relations among economic actors. (Robert D. Putnam, Comment on 'The Institutions and Governance of Economic Development and Reform' by Williamson, Proceedings of the World Bank Annual Conference on Development Economics (1994), pp He emphasizes the role of social capital, (James S. Coleman, Norms as Social Capital, in Gerard Radnitzky and Peter Bernholz, eds., Economic Imperialism: The Economic Approach Applied Outside the Field of Economics (New York: Paragon House, 1987), pp ), that has been defined in turn as the aspects of the structure of relationships between individuals that enable them to create new values, through facilitating action. See Elinor Ostrom, Crafting Institutions for Self-Governing Irrigation Systems (San Francisco: Institute for Contemporary Studies Press, 1992) for further discussion. 2 and the bureaucracy. Thus, the use of governance is close to that of John Lewis: the politics, but, even more, the texture and machinery of government, the bureaucracy, and its interactions with politicians and interests. 2 Most importantly, we take an economist s view of the role of government, i.e., as a provider of public goods and corrector of externalities. Thus the role of the government as a guarantor of civil and political rights, valued mainly on noninstrumental grounds (Elster, op. cit., p. 217), or as an implementer of social equity objectives, is kept in the background, though one may also view the provision of rights or of equity as instrumental concerns, and therefore akin to public goods in nature. As an organizing principle, we analyze governance along three dimensions: (1) the degree of commitment or durability of laws and rules, (2) the degree of enforcement of these laws, and (3) the degree of decentralization of jurisdictions with respect to providing public goods. This is not a perfect or complete categorization, 3 but still a useful one. We examine each of these dimensions in turn, in sections 3-5, prefacing this with a review of the literature on governance and economic performance, with particular reference to India. The purpose of the analysis that follows this review is to identify, in India s case, aspects of particular dimensions of governance that may have had adverse consequences for economic efficiency. Our analysis is meant to suggest a conceptual framework for empirical work, rather than providing definitive empirical answers. The paper concludes in section 6 with an overall assessment, including a consideration of collective action in general, as well as alternative structures of institutions of governance. Before turning to the analysis, we summarize India s main institutions of governance. India is a constitutional democracy, comprised of 28 states, six Union Territories (UTs), and the 2 See John P. Lewis, India's Political Economy: Governance and Reform (Delhi: Oxford University Press, 1995). At the same time, this investigation is narrower than Williamson s, in not dealing with corporate governance or forms of what Williamson calls private ordering. 3 For more complete conceptual discussions, see Williamson, op. cit., Jon Elster, The Impact of Constitutions on Economic Performance, Proceedings of the World Bank Annual Conference on Development Economics (1994), pp , and the references therein. 3 National Capital Territory of Delhi. It has a British-style parliamentary system, with universal adult suffrage and first-past the post elections, and a bicameral legislature. Legislative powers rest primarily with the lower house, the Lok Sabha. The Prime Minister is the effective executive, though there is also a President, who has some powers of persuasion and guidance. India s structure is explicitly federal, but with features that emphasize the power of the center over subnational units. Delhi, the UT of Pondicherry and all the states have elected (unicameral) legislatures, with Chief Ministers in the executive role. Each state also has a Governor, nominally appointed by the President, but effectively an agent of the Prime Minister. The constitution also assigns certain statutory powers to the states: the exact nature of this assignment, and how it has played out in practice, determine the extent of centralization within the federation. The Indian bureaucracy has played a continuing and important role in the country s governance, its main structures having been inherited almost intact from the colonial period. It is provided constitutional recognition. The central and state level tiers of the public services are given shape through the provisions of Part XIV of the Constitution. The key component of the bureaucracy is the Indian Administrative Service (IAS). IAS members are chosen by a centralized process, and trained together. In India s version of indicative central planning, bureaucratic discretion was (and, in many respects, continues to be) extremely important, and the IAS has had tremendous power and prestige for most of independent India s existence. At the national and state levels, the judiciary constitutes a distinct branch of government, though the legislative branch influences appointments. At the local level, IAS members are vested with some judicial authority. The Supreme Court stands at the top of the Indian judicial hierarchy. Its powers include broad original and appellate jurisdiction and the right to pass on the constitutionality of laws passed by Parliament. In practice, there has been conflict between the Supreme Court and the legislature/executive over the scope of these powers, and their boundaries remain subject to bargaining, though one can generalize that the Court has been 4 overshadowed by the central legislative/executive branch. The President, in consultation with the Prime Minister, appoints Justices of the Court. At the state level, below the Supreme Court, are the High Courts, whose justices are appointed by the President, in consultation with the Chief Justice of the Supreme Court and the state s Governor. Paralleling the situation at the center, the state s Chief Minister can influence the Governor s advice. High Courts also have both original and appellate jurisdiction, and they superintend the work of all courts within the state. 2 Governance and Growth The link between governance and economic performance was originally developed by economic historians such as Douglass North. North argues that, economic history is overwhelmingly a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth. 4 The evidence used by historians is typically broad comparisons of countries over long periods of time. More recently, there have been substantial efforts to develop mathematical models of the link, and to provide empirical tests. The mathematical models provide greater precision in terms of causal effects. For example, Rivera-Batiz analyzes the impact of democracy on the quality of governance, which is the level of corruption in his model, and how that, in turn, affects growth. Gradstein, in an analysis close to North s arguments, examines the impact of enforceability of property rights on growth. There are many similar models, all of which involve considerable abstraction and simplification. 5 Note that enforceability, absence of corruption, and so on can be considered to be public (non-rival) goods from an economist s perspective. 4 Douglass C. North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990). 5 See Francisco L. Rivera-Batiz, Democracy, Governance, and Economic Growth: Theory and Evidence, Review of Development Economics, Vol.6, No. 2 (2002), pp ; and Mark Gradstein, Governance and Economic Growth, World Bank Policy Research Working Paper 3098 (July 2003). 5 Empirical analyses typically look at cross-country data, formalizing, in a sense, historians case study comparisons. In order to conduct such analyses, various data sets have been constructed, attempting to capture different dimensions of governance. Table 1 summarizes three of these data sets. The first, from Freedom House, is the easiest to understand, since it is a narrow measure of political rights and civil liberties, what one broadly associates with democracy. The second has six different indices of governance, representing different clusters. One interesting point is that these clusters combine structure, conduct and performance of institutions of governance. Most of the indices are self-explanatory, in terms of what they are meant to capture. Government effectiveness, however, may be elucidated further. According to the authors, it combines assessments of the quality of public service provision, the quality of the bureaucracy, the competence of civil servants, the independence of the civil service from political pressures, and the credibility of the government s commitment to policies. Finally, the third index, GADP, which is used by its authors as one half of an index of social infrastructure, itself combines five measures, of bureaucratic quality, law and order, risk of appropriation, corruption and government repudiation of contracts. Cross-country regressions, unsurprisingly, tend to find quite strong positive links between governance and growth, with much of these results being driven, perhaps, by differences between developing and developed countries. For example, Table 1 reports India s scores, which are typically much lower than the United States. On the other hand, they are not dissimilar to China s ratings. Comparisons within similar groups of countries are therefore harder to make using such data: for example, China s economic performance in the last 20 years has outstripped India s, but only in stability and effectiveness does its governance seem to rate higher. While this suggests a detailed comparison of India and China would be useful, it is beyond this paper s scope. However, the point that remains valid is that a consideration of a country s governance institutions within a conceptual framework may give pointers toward their impact on economic performance. 6 Just as India is not the worst country in terms of governance measures, it has also been a reasonable performer in terms of economic growth. From independence in 1947 through the 1970s, India s economic growth was reasonable, averaging 3.75 percent per year, but this was not rapid enough to significantly diminish the number of poor people. Changes in economic policies, starting in the 1980s, but especially in the 1990s, seemed to be associated with India moving to a more satisfactory range of 5 to 7 percent annual growth. One might argue that further economic reform will push this rate still higher. However, there is a case to be made that further economic reform itself is intertwined with improved governance, along the different dimensions indicated in Table 1. As we noted, the empirical indices attempt to combine many different facets of governance, which may themselves interact (Rivera-Batiz, op. cit). In particular, they combine aspects of governance structures with the conduct and performance of government. Abstract theoretical models are somewhat clearer, focusing on deadweight losses through what Bhagwati has called Directly Unproductive (DUP) activities (including corruption and rent-seeking), 6 and on uncertainties in governance that inhibit private investment. In subsequent sections of the paper, our focus on durability, enforceability and decentralization examines these aspects of governance structure for India, and how they feed into the conduct and performance of government, and ultimately of the economy as a whole. 3 Durability By their nature, laws are meant to be somewhat durable, that is, to last for some time. In practice, of course, informal social norms may have greater durability. Here we focus on codified laws, whether written down in statutes and regulations, or established by formal judicial precedents. Within this category, there may deliberately be different degrees of durability. Constitutions are obviously meant to be more durable than other laws, being made relatively 6 Jagdish N. Bhagwati, Directly Unproductive Profit-Seeking (DUP) Activities, Journal of Political Economy, Vol. 90, No. 4 (October, 1982), pp difficult to amend. Within a particular constitutional framework, specific laws may be changed more easily, by legislative action. Administrative rules and ordinances are the least durable. The durability of judicial precedents is less clear, depending on the actual workings of the judicial system. Ideally, we would expect precedents to make the interpretation of laws more durable than simple administrative procedures. To some extent, also, this issue overlaps with that of enforceability, and we return to it in the next section. Rationale The rationale for durability is twofold, involving the economist s usual dichotomy of equity and efficiency. The kind of durability built into constitutions involves both; there are protections of individual and in the case of India and many other countries group rights against future attack. This may be justified on ethical grounds, rooted in equity considerations. Provisions to protect property rights, such as requiring government compensation for takings, may be seen as enhancing efficiency by reducing investment-inhibiting uncertainty. 7 In practice, any constitutional aspect can have implications for both equity and efficiency. For example, protecting some minority rights may be necessary for their acceptance of the constitution, avoiding either a less efficient country composition without the minority, or the costs of future conflict if minority concerns are ignored. Or, in the case of protections for private property, these may be seen in terms of fairness, and a particular attitude towards the status quo distribution of property. Thus equity and efficiency considerations are not separable in practice. The efficiency rationale for durability may also be seen in terms of the benefits of precommitment (i.e., the ability to publicly stick to some predetermined course of action) to 7 In particular, the durability of a constitution that limits the power of governments to abrogate private property rights has been stressed as important for efficiency by Geoffrey Brennan, and James M. Buchanan, The Power to Tax: Analytical Foundations of a Fiscal Constitution (Cambridge: Cambridge University Press, 1980); Douglass C. North, and Barry Weingast, Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England, Journal of Economic History, Vol. 49, No. 4 (1989), pp ; and Barry R. Weingast, Constitutions as Governance Structures, Journal of Institutional and Theoretical Economics, Vol.149, (1993), pp avoid the problem of time inconsistency. 8 This term refers to the problem that a government or other economic actor may announce a policy, but then have incentives to modify it once others have responded to the policy. 9 If all eventualities can be anticipated, then, ex ante, having precommitment will be better than not having it. If, in some eventualities, there will be ex post renegotiation of contracts, laws, rules or agreements, this, too, can be anticipated ex ante. In such cases, some degree of flexibility, by allowing renegotiation, may improve ex post efficiency in some states of the world at the expense of ex ante efficiency. 10 If all eventualities cannot be anticipated, then precommitment is de facto incomplete. In practice, therefore, the optimal degree of durability is impossible to prescribe in general. Perhaps the only possible, rough generalization is that there should be a tradeoff in practice between specificity of laws and their durability, as measured by the difficulty of changing them. We use this idea to examine the durability of laws in Indian experience. Constitutions On can argue 11 that India s Constitution, while avoiding the problem of being over-specific (a charge that has been made about Brazilian constitution-making efforts), has been 8 Finn Kydland and Edward Prescott, Rules Rather than Discretion: The Inconsistency of Optimal Plans, Jou
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