The Hindu Business Line : Development, market and government

MANY development issues still remain unresolved. Notions of "development" vary. Consider a "developed society". The main factor used to understand it is income. But other factors such as health, freedom, unemployment, family and community life, governance, political stability and gender equality are equally important. Thus, a uniformly high physical quality of life is a minimal requirement for a "developed" nation and this should not be restricted to an incongruously affluent minority.

An equally accessible level of material well-being is probably a prerequisite for most other kinds of advancement, apart from being a worthy goal in itself.

Globally, there are different models of economic development. The lesson of economic development in the Caribbean is that successful development requires markets underpinned by solid public institutions. Ideally, the institutions should protect property rights, regulate market participants, maintain macroeconomic stability, provide social insurance and manage conflict.

The Caribbean countries fashioned their own workable development model for implementing these parameters. The home-grown strategies adopted by select Caribbean economies reveal their own model of successful development and not blind imitation of American-style capitalism.

The policymakers at the initial stage of development targeted the formation of social capital in the region. Social capital and trust made economic transactions more efficient by giving parties access to more information, enabling them to coordinate activities for mutual benefit and reduced opportunistic behaviour through repeated transactions.

Indeed, this played a significant role in shaping outcomes of economic action at both the macro- and micro-level. While sustained growth has not been "beyond 6 per cent", there has been a clear tendency towards rising real income per head, falling unemployment to fall (partly as a result of significant rates of emigration) and increasing investment levels, even though driven partly by foreign capital.

The case of Barbados is especially significant in this context. Its achievements in raising life expectancy and the quality of life make for development economics literature. The island nation is now in the top ten countries in life expectancy (76.4 years) — a figure equal to that of the US and the UK (77.5 years). This is despite its remarkable economic expansion leading to high per capita income.

Historically, India, for all the hoopla over her development, still falls in the lower half of the league. In some parts of rural India, things have gone from bad to worse. The so-called idea that growth will take care of inequality is a distant possibility, not just in India. The same is applicable in the context of a large number of Latin American economies as well. In this scenario, steps have to be taken, be it in the form of the Rural Employment Guarantee Act or any other state intervention to ensure that development does not bypass certain people or certain regions.

It may be useful to quote the common statistic with respect to development programmes that out of every rupee only 15 paise reaches the beneficiary. In other words, the system will ensure the loss of the remaining amount in the form of high transaction costs. This is common to most developing nations. This problem reminds us of the strong role of institutional infrastructure required in a market economy.

"Government failure leads to market failure" and so the government should play a role in this context. The state and the market are complementary to each other and it is important that the state undertakes its "responsibilities" and does so effectively and efficiently.

The theory of market failure, especially as applied to developing countries, allows us to understand the appropriate role of the state. That does not mean that the government should stay away from intervention in favour of some clearly identified target beneficiaries who are likely to be bypassed by the engine of development.

Policy-makers often debate the appropriate role of the state in implementing development programmes. Government failure leads the funding agencies to explore the alternative mean — the non-governmental organisations (NGOs).

But for few exceptions in Asia and Latin America, "trickle down economics" has not happened in developing countries.

Good governance, institutional accountability, and the integrity of the politicians can make all the difference. Experience suggests that rather than there being a conflict between governance and institutional accountability, the two should be complementary. The East Asia and Caribbean island nations' effective education policies, for instance, played a pivotal role in their respective economic development. This has led to political and social stability, thereby creating a better investment environment.

Economic actions are guided by political action. Success of economic action also depends greatly on their political background. It is important and essential in the Indian context to appreciate this duality.

(The authors are Professors at the International Management Institute, New Delhi.)

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