Efficiency, enterprise and India

Unfinished Business
January 21, 2000

Since the fundamental problems of humankind are not just economic, but have social, political and psychological dimensions, it is as well to view economics from an institutional perspective. In this book, a collection of 11 essays, and not about India alone, Deepak Lal does that. Add to an institutional framework, grounded in classical liberal assumptions, a sense of history and you have the makings of a fascinating volume to be read by everyone who wants to understand the country and ask: where is India going?

The first chapter is about Indian economic growth. Considerable debate has taken place on whether growth "trickles down" and uplifts the poor. In comparison with high-growth East Asian countries that have reduced poverty, lack of growth accounts for high Indian poverty levels. Lack of growth arises because of India's inability to industrialise efficiently (some of my figures show that industrial productivity is a sixth that of developed countries). Agricultural output, so critical to remove the Malthusian spectre, has merely kept up with population growth; and that too because of the green revolution.

The next three chapters deal with the world economy, a comparison of the performance of China and India, and the role of democracy in promoting economic development. The world economy chapter takes a broad look at economic development over the course of this century. The author argues that a liberal international economic order was in place at the turn of the century, but broke down and began to reappear in the past two decades. This breakdown occurred, in part, because the state discarded its civil role, in which it was the custodian of laws and did not interfere with citizens' preference orderings, and took on an enterprise role where it managed people's lives. As recent circumstances have propelled the discarding of the enterprise role, a liberal economic order has emerged again, aided by technology. In the light of this dynamic, the predilection of bodies such as the European Union to assume ever-increasing enterprise roles is looked at askance.

The China and India chapter and the one on participation, markets and democracy are different in nature and provoke questions. How has China, a country less democratic than India, performed better economically? One reason is that China has invested

much more than India has. Also, these

investments have been more productive, thus yielding a much larger growth rate. Furthermore, is an authoritarian regime better for poverty alleviation and development because of the discipline it enforces in enhancing efficiency with which resources are utilised?

Subsequent chapters deal with: issues of trade policy and natural monopoly regulation, the role of public and private sectors in health financing, the costs and benefits of nuclear weapons, the issue of foreign aid, and eco-fundamentalism. Some chapters succeed better than others. All of them, however, contain deep analysis that displays a master at work.

The last chapter concerns the communications revolution and how it reshapes transactions costs. Several issues follow from points raised in the chapter that, I feel, are important for taking a forward-looking view of India. Transaction costs are the costs of undertaking economic activity. They arise because of the need for monitoring and policing. These needs are fuelled by information asymmetries.

A lowering of transaction costs leads to efficiency. Good communications lower transaction costs by making economic activities transparent. For India, the communications revolution has important implications. Between 1972 and 1977, there was large-scale diffusion of television broadcasting. Indian democracy came of age in the elections of 1977, when voters threw out Mrs Gandhi's draconian regime. The television and print media revolution has made India politically efficient to some degree. India is the world's largest working democracy. If modern information technology diffuses into the political process to the same degree as television, there can be significant efficiency improvements. Such a diffusion process can enhance transparencies in the markets for consumer goods and administrative services acquired from the government. This process can enhance individual sovereignty, an outcome in keeping with the classical liberal credo. Focusing on communications will help India towards the goal of progress for all her people.

Sumit K. Majumdar is professor of strategic management, Imperial College, University of London.

Unfinished Business: India in the World Economy

Author - Deepak Lal
ISBN - 0 19 564548 0
Publisher - Open University Press
Price - £20.99
Pages - 293

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