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Saturday, May 22, 2004

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When law is very costly, slow, corrupt, weak or simply absent

D. Murali

PEOPLE who vote for a different government, that too not decisively, usually bargain for days of limbo when almost nothing happens, except flash news and tickers, wild guesses and mild progress. Elsewhere, in a land that Saddam once ruled, there is a different sort of confusion with a deadline ticking on transfer of power. And Avinash K.Dixit's book on alternative modes of governance could not have come at a more appropriate time. Titled dramatically, Lawlessness and Economics, and published by Princeton University Press, the blurb asks pointed questions: "How can property rights be protected and contracts be enforced in countries where the rule of law is ineffective or absent? How can firms from advanced market economies do business in such circumstances?"

Law is not economical and economics is never without laws, so what are we talking about? Survival, when governments are not doing all that you wish. Institution-building in less-developed countries is tough, making it necessary for you to look for private mechanisms — "such as long-term relationships, arbitration, social networks". These alternatives do not vanish in countries with strong legal systems but "continue under the shadow of law."

"Those who like to see unity in the social sciences could not wish for a better field," announces Dixit. "It contains ethnographic studies by anthropologists and sociologists, case studies by lawyers and economic historians, and formal modelling and data analysis by economists and political scientists."

And a more powerful invitation: "Think of this book not as a menu from which you can order and consume, but as a prospectus inviting you to invest." Contents page, however, has a carte du jour with chapters that are inviting enough, such as: Economics with and without the law, private ordering in the shadow of the law, relation-based contract enforcement, profit-motivated contract enforcement, and private protection of property rights.

That a country needs governance, is what everybody realised during the week — at least to get rid of those nagging reporters and TV cameramen depicting live every slip and gaffe, questioning strategic silences and picking strained brains of anybody who dared the mics, and weaning viewers away from their favourite soaps and soccer.

"Most economic activities and interactions share several properties that together create the need for an institutional infrastructure of governance," writes the author. Reasons are at least three: One, value is created or added because of these interactions; two, activities require inputs from several individuals; and three, parties involved make contracts while interacting. Economic value is what we all want, but there are three disincentives: opportunism, that you see when someone supplies defective goods or shirks on the job; theft, where a person "can wait for someone else to create property or produce and then steal it; and extortion, that is, taking money from others "by making threats of destroying their property." These are `dysfunctional behaviours' and "if market economies are to succeed, they need a foundation of mechanisms" to daunt such negative forces.

Economists love to assume even love, and one of their favourite conjectures, at least till recently, was to assume that the government provided the needed governance. What a joke, you may laugh, but economics took the law for granted, even as law was taking everybody for a ride.

"It was a useful abstraction in its time," notes the author, philosophically. Rarely is the apparatus of state law ideal — "in which the government supplies legal institutions that are guided solely by concern for social welfare and operates at low cost". What is more common is law that is "very costly, slow, unreliable, biased, corrupt, weak or simply absent." Do you know that "there are 25 million cases pending before courts in India, and even if no new ones are filed, it will take 324 years to clear the backlog"?

With a shaky law and wobbly governance around, economic activity "does not grind to a halt", only "too much potential value would go unrealised." Therefore, groups and societies have much to gain if they can create alternative institutions to provide the necessary economic governance, reasons Dixit. But Western-style legal institutions as such are not the answer for LDCs.

"Institution design or reform is often posed as a matter of binary choices — shock therapy versus gradualism, mimicking Western laws versus keeping national or local customs. But this is too simplistic." Work instead on "subtle mixtures of speeds and features that work well in combination," advises the author.

It is difficult to put down the book, and so if you idly thumb through the pages, you may land in "a predatory state and its citizens". Something scary: "In many countries, the supposed protectors of property rights, namely the government and its agents, are themselves the predators."

They come in all shapes and sizes: "If the state predators are short-lived `roving bandits', the incentives to produce and invest may be destroyed completely. But longer-lived `stationary bandits' will recognise that they stand to gain over the long run by committing themselves not to steal too much at any one time." A bit too close to explaining the anti-incumbency factor?

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When law is very costly, slow, corrupt, weak or simply absent

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