The Hindu Business Line : Economic governance, key for further development

Some academicians and policy-makers believe that the present tempo of investment and economic growth in India will not continue for long unless there is a visible and enduring change in governance, in general, and economic governance, in particular. The latter usually comprises upholding property rights and enforcing contracts.

‘Governance Institutions and Development’ was the theme of the Second P. R. Brahmananda memorial lecture delivered by Prof Avinash K. Dixit, a distinguished economist and holder of a chair professorship at Princeton. The lecture was delivered in Mumbai on June 28 and its text published in the latest Reserve Bank of India Bulletin. The importance of economic governance is pervasive.

In infrastructure, for instance, the fact that we are doing better now than in the past is no consolation. There is no denying that we need much better power supply, roads and ports. It is often stated that several hundred billion dollars of investment is needed as soon as practicable to boost the infrastructure sector. The government cannot provide all the investment funding, which has to be shared by the public and private sectors as well, This would call for effective economic governance, encompassing upholding property rights and contract enforcement.

Property Rights

“When titles to land and capital are official and secure, people need not spend time and effort to guard their rights, so they can put the labour and time to productive use”, observed Prof Dixit.

Take a look at houses allotted to serving employees of the Central or State government, or even public enterprises. They are poorly maintained, despite the collection of a rent, in part due to the fact that the quarters are not owned and the owner hardly cares or penalises the renter for poor maintenance. Even private housing rented out has its consequences over and above poor maintenance by the renter. Some years ago, a poor lady had lost legal rights to the renter of her own house simply because a lot of time elapsed in court cases to evict the renter. Having learnt their lessons, most people tend to keep valuable real estate under lock and key rather than renting it out.

The situation is totally different in the case of land. Private landlords can rent the land to the tiller, with insecure tenure threatening the renter, and poorly enforced land reform legislation hardly coming to the rescue. Yet, as studies on farmers’ suicides have revealed (Business Line, August 8, 2006), the vast majority (over 80 per cent) of those taking the extreme step are small and medium landowners.

Debt is the cause, and so secure titles that enable farmers to borrow may not mean much unless other complementary policy and programme actions are in place. Yet, these comments in no way understate the importance of secure land titles for the progress of agriculture and, more important, the progress of the millions depending on that sector. It should also be noted that property ‘wrongs’ must be avoided while taking care of the rights. For instance, Prof Dixit rightly mentioned in his lecture that any amount of policy debate on the Special Economic Zones should be welcome, but the debate in no way should create the fear among investors “of revocation of rights and benefits that have been granted through a proper policy process…” A lot of heat of the SEZ debate would have been avoided if land under cultivation was specifically barred from conversion to non-agricultural uses, including SEZs.

Corruption

Part of the problem with property rights is the high level of corruption inherent in most property deals. “…a predictable level of corruption will also deter economic activity, but the deterrent effect of uncertainty is likely to be much bigger.” That was like listening to a commentator on corruption in Indonesia of the Suharto era, when people used to accept corruption as part and parcel of the forces that maintain the efficiency of the overall system. We in this country also have accumulated enough ‘wisdom’ to tolerate bribing, consoling and comforting ourselves that bribe is no more than a transaction cost.

The important point, however, is that corruption starts hurting sooner or later. High growth will not be sustained unless we tackle the issue of corruption and take measures to first control and then root it out. Here is a statement in the lecture that is worthy of note: “The top level of government, even if itself well-intentioned, needs sufficiently drastic punishments at its disposal to keep the lower and middle-level agents in check.” We could add that the drastic punishments have to be meted out relatively quickly, if others were to learn and shy away from being corrupt.

There is also the case for at least some top guns in industry and commerce to come down on corruption and publicise the fact that they are not going to bribe. This would end up as the best service they could do to the society in place of all else that is paraded as corporate social responsibility.

Contract Enforcement

“If Indian courts or Indian industry-based institutions can develop a credible reputation for not favouring their own nationals, they will have an immense advantage when it comes to entering into contracts with foreigners, in particular, in attracting foreign investment. Indeed, this may be a key to success as India integrates with the world economy and attempts to obtain gains from globalisation.” This is absolutely true in regard to large investments and high-value contracts. We can ill afford a repeat of the Enron saga.

The issue takes a different turn when it comes to small and medium businesses. Costs of litigation and arbitration might turn out to be prohibitive and people just take what comes rather than seek the enforcement of contracts. In such cases, as in the case of farm debts, authorities are often caught between contract enforcement and humanitarian concerns. The problem can be overcome to a large extent if there is a growing sub-contracting relationship between the large and small and medium businesses. In such a scenario, the large firm handholds, guides and interacts with the small firm and contract enforcement could cease to be a major issue.

Accountability

One learnt from Prof Dixit’s lecture that the practice of publishing audited accounts by companies owes its existence to the private initiative of Mr J. P. Morgan, a little over a century ago, and not to government initiatives. And, Prof. Dixit also spoke of the interesting case of the CEO of Aflac, allowing shareholders to vote on his compensation, which practice too could spread in course of time.

“The Right to Information Act can have major beneficial effects by removing information asymmetries and improving accountability. Public interest litigation and ‘people’s courts’ can also serve a useful role, although sometimes such institutions can act for very small and single-issue interest groups and, thereby, become an obstacle to much-needed economic progress.”

At the end of it all, we must not forget that manuals are man-made and institutions are the constructs of individuals. If people in power are devoid of minimal values, any system can become bankrupt in course of time.

(The author is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam and Visiting Faculty, Sri Sathya Sai University, Prashanti Nilayam. He can be reached at bhanoji@gmail.com)

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