The Hindu Business Line : `Empower panchayats to root out poverty'

To the extent that monitoring and control structures for bureaucrats are weak, power can be devolved from the bureaucrats to panchayats where monitoring is better.

Dilip Mookherjee, who is Director, Institute for Economic Development, Boston University, lives in Boston with his wife, Nalini, and their two children. After a Ph. D. from the London School of Economics in 1982, he taught at the Graduate School of Business, Stanford University till 1989, when he shifted to India and taught at the Indian Statistical Institute, Delhi till 1995. He was involved with the framing of the New Economic Policy in India in 1992-93, and was a consultant with the Tax Reforms Committee under the chairmanship of Raja Chelliah.

A recent book of Mookherjee on `new development economics' is Market Institutions, Development and Governance from Oxford University Press (www.oup.com) . In it, he tries to integrate social factors into economic analysis — such as why politicians find it worthwhile to grab vote-banks, and bureaucrats tend to be dishonest. Here, the author Mookherjee takes on a few questions from Business Line.

What is `new development economics'?

It is a field rooted in the behaviour of individuals, households and firms, rather than on macro aggregates.

It is based on a richer description of the environment they operate in, and of the strategic behavioural opportunities available to them. It is concerned with welfare of individuals, poverty, inequality and human development.

This field rests on intellectually coherent theories of micro behaviour, and on factual analysis of what is happening at the ground level. It is interested in the institutional framework for development — both market and governance institutions.

Is India destined to suffer from persistent and diverging inequality?

Not at all. It depends on policies and institutions in place. We have a legacy of socio-economic inequality but the economy is growing fast now. And with the right policies and institutions, the poor will have new opportunities available to take advantage of. We have seen in other developing countries — particularly East Asia — that it is possible to reduce poverty dramatically within two to three decades. The size, heterogeneity and democratic traditions of India make it more challenging.

How can tax administration be improved?

In the first place, change the laws and their enforcement. Remove the opportunities for well-connected taxpayers to evade taxes through settlement, amnesties. Secondly, revamp the tax administration — staff, pay, resources, information systems.

Empower and motivate tax officials to catch tax offenders rather than take bribes. Thirdly, improve vigilance mechanisms.

Take any two aspects of the Indian economy's weakness, and suggest how these could be taken care of.

First, rural poverty. We need to empower local governments, giving them funds, functions and functionaries (the term used by Mani Shankar Aiyar), and creating institutional safeguards for their accountability (election procedures, accounting norms, village meetings, transparency, checks and balances created by local citizen councils that have veto power, checks by upper level governments). I would emphasise the need to let panchayats run schools and health clinics. Also allow transparent formula-based grants to panchayats, so they cannot be used as instruments of political patronage.

Second, empower the poor — through land reforms, information campaigns, wider access to credit and infrastructure, employment programs, conditional transfers (conditioned on sending their children to school and for medical checkups and immunisation).

These should be funded by the central and State governments but administered by the panchayats. These measures would be complementary to the first.

Do you see information technology contributing to the goals of new development economics?

Absolutely. It can help improve both market and governance institutions.

Can freebies, such as free power, and subsidies lead to development?

Subsidies have to be chosen carefully, and must help those who really need it. There should be subsidies for health and education for the poor, not power for the rich.

On reservation based on means test. Should affirmative action such as quota system exclude the creamy layer, or the affluent?

Yes, absolutely.

You have written, "Central politicians... hardly have any power to control the corruption even if they wished to." Doesn't this imply that policy-makers are helpless? Is it because such people are one in a zillion? What then is the way out of corruption?

To the extent that monitoring and control structures for bureaucrats are extremely weak, there is little that honest and zealous politicians can do to control low-level corruption, even if they wanted to. I am not saying they never want to, instead that their hands are tied by civil service norms and antiquated monitoring and control systems inherited from the British Raj.

Given this, one possibility is to devolve power from the bureaucrats to panchayats or local communities where monitoring is better. But accountability may or may not be better compared to state bureaucracies. It depends on local institutions of democracy, how well they are designed and how well they function.

In some settings such as Kerala or Karnataka, they are well designed and can function well. In West Bengal they function well in some aspects and not so well in others. In Bihar or Uttar Pradesh, they are neither well-designed nor do they appear to function well. So, for the last group of states, either some way is to be found to empower local communities and democratic institutions, or they will be better off with State bureaucracies.

On the gaps in economics education in India?

It is huge, especially in teaching students how to do empirical work appropriate to Indian conditions. There is too much emphasis on theory.

Why is it necessary for an economic journalist to be familiar with new development economics?

Development economics has evolved over the past quarter century, with newer analytical tools. The topics addressed today have changed markedly: It is less about planning and more about how market and governance institutions work and how they could be redesigned to reduce poverty and accelerate development.

The former include land reforms, credit contracts, marketing arrangements for products, infrastructure, education and health. The latter include tax administration, bureaucracies, corruption, and fiscal decentralisation.

A lot of serious analytical work is being done on these issues, embracing theory and empirics in equal measure, and economists have a lot to say on these issues.

You say: "... it seems plausible that acquiring and processing information is costly and time-consuming for the poor who are resource-constrained, illiterate and overworked." Don't electronic media and information technology reduce disparity?

We may need more empirical studies. I am doing one on farmers in West Bengal, and I find large differences in awareness and information by land status, education status and caste status. But in many other developing countries it is not there. For example, in Latin America, studies show that only education matters, and not socio-economic status.

I am just starting a new project on potato farmers in Bengal, studying differences in information they have about market conditions.

Abhirup Sarkar (an economist now with the Indian Statistical Institute, Kolkata) has done prior studies (published in Economic and Political Weekly) showing that small potato farmers earn significantly less than large farmers and traders because the latter have better information and can time their sales better. I think the situation is changing fast with the arrival of cell phones, STD booths and TV access in rural areas.

What do you predict would happen to the policy recommendations of your model if you were to allow the local government to tax the non-poor section of society?

Yes, this is considered in another paper with Pranab Bardhan that appeared in Economic Journal January 2006. If there is capture of local governments by local elites, then local governments will allow the local rich to evade taxes (by under-assessing their properties, for instance). Instead, local governments tend to tax the poor (through indirect taxes such as octroi, establishment charges etc. whose incidence is primarily on the poor) and use this to fund to service delivery to the rich. So the situation gets worse.

D. Murali
Goutam Ghosh

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