Institutions and their impact on India’s growth

I have been noticing one thing lately- the work of number of  (born in India /having Indian roots) economists has been increasingly being focused on Indian economy. It is quite a good thing as they understand India better and hence their research should have a better understanding of the nuances involved. As we hardly do any worthwhile research in India, atleast we get some perspectives.

I was just reading this paper by Arvind Subramaniam (AS from now on, I had done a review of his papers earlier as well, here and here) which talks about evolution of India’s institutions and their impact on Indian economy. Unlike his other papers this one is really well done and stands out for its simplicity.

The papers explains a number of paradoxes:

1.  Why has growth taken off despite the general consensus that institutional standards are falling?
2. Why hasn’t growth led to better institutions?

AS answers:

India’s founding fathers bequeathed a strong set of institutions, much stronger than for the average country. These institutions have played a key role in the turnaround in India’s recent economic performance, a fact that has been overshadowed by, and because of, the more dramatic and necessary reduction in the ownership/regulatory functions of public institutions (a process that is usually described as policy reforms). Over time, though, it is not obvious that India’s public institutions are keeping up with the demands of a rapidly evolving economy. Thus, contrary to the near-universal views that the binding constraints to sustained Chinese-style rates of growth are the need to finish the unfinished task of rolling back the frontiers of the state, giving full play to the energies of the private sector, this paper implies that a future reform agenda should focus equally on strengthening, or reversing the decline in, public institutions.

AS answers something which I have been wondering all along. How does one measure the performance of India’s institutions (insti from now on) ? To this, AS presents 3 ideas:

1. Stylized facts on insti outcomes: this means looking at statistics like murders, power-related losses etc. He offers a caveat though:

Of course, outcomes are determined by a number of factors, including the quality of institutions. So, it is difficult, if not impossible, to draw inferences about institutions and their evolution over time from outcomes, unless we can control for these other factors. For example, if disposal rates of judicial cases declines it could be due to inadequate resources (judges, lawyers etc); or to corruption; or to the fact that murder rates themselves are increasing for extraneous reasons (guns are more readily available, income leads to more crime and so on);or some combination of the above.

In this AS points to following:

a) Power losses/thefts: it has increased over time.
b) Disposal rate for murder related cases: it has gone down meaning the backlog of murder cases is rising
c) Conviction rates for murder cases: this has also fallen

(All the above can be looked at positively as well, read the paper for details)

2. Perception-based measures of institutions: These are subjective measures and are based on surveys. AS explains various papers that have calculated these measures. His findings on India are:

In 1960, India’s rating was close to 1.5 standard deviations above the mean, a very high rating, placing it amongst the very top of the 74 countries surveyed by Adelman and Morris (1971). In the last decade, India’s score has been close to zero, denoting an average rating. If these measures are at all plausible, the picture they convey is one of decline—substantial decline—since the 1960s.

3. Isolating the effect of institutional quality: AS explains this by doing a case-study of Indian customs. He in another paper has done a study of evasion(difference between the recorded exports at the origin and the recorded imports at the India) by Indian custom officials at Indian ports. And they find evasion increasing overtime. 

So whichever way you look at it, quality of institutions is falling. AS says but growth has been happening since 1980’s and the institutions quality has been falling, so what has led to growth?

Another puzzle is most countries started reforms in 1980s and 1990s (Latin America, Sub-Saharan Africa etc) but none have achieved the growth levels of India (except China). Infact reforms in latter have been more and deeper than in India.

Yet the growth response in these other countries has not been close to that in India. Since 1985, Latin America and sub-Saharan Africa have grown by about 1 percent per capita per year, while India has grown at about 4 to 4.5 percent.

What explains all this? AS’s main point is that India had good quality institutions pre-1980 which led to economic growth after 1980s. But since then institutions’ quality has been falling and it is this aspect which needs to be corrected alongwith  hard infrastructure like power, roads etc.

As says reserach has shown that rising incomes lead to better institutions but this has not happened in India, which is surprising given the fact, that lot changed in India after reforms. (transparency increased due to media, licence raj was dismantled, greater decentralization of power etc should have led to better institutions).

The effect of poor quality of instis has been that despite fall in poverty divergences have increased and public institutions are not able to attract talent.

Hence, we should focus on improving institutions. The final message is:

A starting point has to be the recognition that allowing institutional decline could well come back to haunt not just policy-makers but the private sector as well, whose fortunes depend crucially on strong and effective public institutions. Rehabilitating the institutions bequeathed by Mahatma Gandhi, Pandit Nehru and others, and not just finding creative ways of working around them, should consume the energies of Midnight’s grandchildren. A rich and relatively unexplored research and policy agenda lies ahead.

After Mr. Panagriya’s paper, I found this one quite stimulating. Keep up the good work Sirs. We need more of such papers to understand Indan economy. After all as AS says is a BS article:

As Joan Robinson famously noted everything and its opposite are guaranteed to be true in India.

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2 Responses to “Institutions and their impact on India’s growth”

  1. The big Indian policy challenge- moving unskilled to skilled « Mostly Economics Says:

    […] improve its public institutions ( I had reviewed his excellent paper on India’s institutions here), lagging states like Bihar and Rajasthan need to catch up […]

  2. India – a flailing state? « Mostly Economics Says:

    […] should also read this superb paperby Arvind Subramaniam which also asks the same – How India is managing such high growth rates […]

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