Reforms can help realise India’s economic potential, provided there are ‘real’ reforms!
The reforms that Dr. Manmohan Singh launched in 1991 have done much to simplify the maze of regulations and licensing that stifled entrepreneurship, but the job is only half done. India rates only around the 50th percentile of the 2007 World Bank rankings on the dimensions of government effectiveness, regulatory quality, rule of law, and control of corruption. In the bank’s latest survey of business environment, almost 60% of those questioned rated corruption as a major or moderate obstacle; the corresponding number for the functioning of the judiciary was about 30% and that for taxes and regulation, 40%. India ranks only 48th among 131 countries on the World Economic Forum’s competitiveness index. This is not good enough for a would-be economic superpower. Business is a mixture of competition and cooperation. Everyone knows and extols the social benefits of competition. In contrast, cooperation is usually identified with cartelization and social harm.
But there are dimensions of cooperation that benefit not only the business community but society as a whole. Improvements in the institutional infrastructure of property right protection and contract enforcement, and improvements in most physical infrastructure, are cases in point. Take corruption, which is rated the most serious obstacle. When firms compete to win lucrative public contracts or licenses using corruption, some win and others lose. But even the winners have to give up some or even much of their profits to pay the bribes. To be sure, each will retain a temptation to cheat and gain an advantage at the expense of others through bribery. What is needed is a system whereby the others can deter the cheater with a credible threat of punishment. Suppose the community has a norm that no one should engage in bribery to win a favorable contract or license. If a member violates this norm, the community stipulates that no others will have any dealings with him. The cheat is going to need some things – material inputs, trade credit, and so on – from the others. If the others ostracise him, he will be unable to fulfill the contract and so won’t profit from his bribery. Of course he can try to induce some of the others to violate the ban by offering them shares in his profits. But that will dilute his profit. More importantly, community also stipulates that anyone who engages in dealings with a cheat is himself labeled a cheater and ostracised. If the business community, with some support from the government, establishes the needed infrastructure, and if the government pursues Rodrik’s other criteria, then India’s great economic potential can be fully realised...
The reforms that Dr. Manmohan Singh launched in 1991 have done much to simplify the maze of regulations and licensing that stifled entrepreneurship, but the job is only half done. India rates only around the 50th percentile of the 2007 World Bank rankings on the dimensions of government effectiveness, regulatory quality, rule of law, and control of corruption. In the bank’s latest survey of business environment, almost 60% of those questioned rated corruption as a major or moderate obstacle; the corresponding number for the functioning of the judiciary was about 30% and that for taxes and regulation, 40%. India ranks only 48th among 131 countries on the World Economic Forum’s competitiveness index. This is not good enough for a would-be economic superpower. Business is a mixture of competition and cooperation. Everyone knows and extols the social benefits of competition. In contrast, cooperation is usually identified with cartelization and social harm.
But there are dimensions of cooperation that benefit not only the business community but society as a whole. Improvements in the institutional infrastructure of property right protection and contract enforcement, and improvements in most physical infrastructure, are cases in point. Take corruption, which is rated the most serious obstacle. When firms compete to win lucrative public contracts or licenses using corruption, some win and others lose. But even the winners have to give up some or even much of their profits to pay the bribes. To be sure, each will retain a temptation to cheat and gain an advantage at the expense of others through bribery. What is needed is a system whereby the others can deter the cheater with a credible threat of punishment. Suppose the community has a norm that no one should engage in bribery to win a favorable contract or license. If a member violates this norm, the community stipulates that no others will have any dealings with him. The cheat is going to need some things – material inputs, trade credit, and so on – from the others. If the others ostracise him, he will be unable to fulfill the contract and so won’t profit from his bribery. Of course he can try to induce some of the others to violate the ban by offering them shares in his profits. But that will dilute his profit. More importantly, community also stipulates that anyone who engages in dealings with a cheat is himself labeled a cheater and ostracised. If the business community, with some support from the government, establishes the needed infrastructure, and if the government pursues Rodrik’s other criteria, then India’s great economic potential can be fully realised...
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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