Governance Institutions & India's Development

Economic Governance Economic governance is a buzzword that has arisen just over the last 30 or so years. EconLit which is among the primary sources of citations of academic articles in economics shows that before 1979, there were only five mentions of the word governance in all of economics academic literature. By the end of last year, the cumulative total has grown to more than 33,000. The trouble with buzzwords is that everyone interprets them in his or her own way. That is unavoidable; therefore I will give you my definition and leave it at that. If other people have somewhat different definitions, that is fine also. By economic governance, I mean the structure and functioning of those legal and social institutions that are essential for economic activity and economic transactions to flourish. They consist of protection of property rights, enforcement of contracts, and a variety of collective actions for provision of infrastructure on which economic activity and economic transactions are built. They include not just the physical infrastructure of transport, communication etc. but also organizational infrastructure by which some of the other prerequisites, namely property rights and contracts, are managed. Why is this important? We all know the reason, but a quick restatement is useful. Security of property rights is essential if people are to accumulate property. If they were not confident that their property would stay in their ownership, if they feared that somebody would rob it, they just would not create or acquire it. Next, it is essential for efficient allocation of assets. You may have accumulated savings, but their most productive use in the economy might be with somebody else. If you give it over to them to manage and they can run away with it, the fear of this prospect will stop you from ever giving it to the most efficient user in the first place. Perhaps even more interestingly, and this may be especially important in the context of India, good protection of property enhances the productivity of labour. If your property in the form of capital, land, house etc. is not secure, you will have spent a lot for your own labour time and effort to try and guard your property. If your property rights are secure, that labour time will be freed up for actually performing productive work. Erica Field, an Assistant Professor at Harvard, in her Princeton Ph.D. thesis showed this to be the case in Peru (Erica Field 2006). I am sure that if a similar study was done in India, it would come up with similar results. Enforcement of contracts is important for similar reasons. Efficient conduct of an economic transaction may require you to perform an action for the other party, and the other party will pay you or perform something else for you later. If the contract cannot be enforced, you are not secure in the knowledge that the payment will actually be made as stipulated. Then you will never step into that transaction in the first place, and the potential mutual gains will not materialize. Something else that is not all that often thought of in the context of governance is collective action. Various kinds of collective action are necessary for provision of public goods, for example management of common resources of the environment and other common property. These issues are prisoner's dilemmas. Provision of public goods requires everyone to contribute, but everyone has the temptation to free ride hoping that the others will provide it. But as my teacher Charles Kindleberger used to say, if everybody free rides, then the bus will never get out of the station in the first place. Collective action is sometimes taken by the government. In fact, theoretically that is why governments are formed. But collective action for economic governance is also taken via many other organizations or institutions, such as NGO's, community organizations of various kinds, and informal institutions of social networks and social norms. …