Fake PM’s Speech — Part Duh

Governance

Yesterday I posted the first part of the fake speech that I wish the real PM of India had delivered. The message in the first bit was simply that there are things that the government is supposed to do and there are things that individuals and the private sector is supposed to do. There is a natural division of labor arising from comparative advantages of the competing parties. The government has a comparative advantage in governance, not in producing stuff. The government must stick to governance. Here’s why.

Ladies and gentlemen, the sole objective of a government has to be to provide governance. The raison d’etre of a government is the creation of social capital, to be a guarantor of civil rights, to maintain law and order, to correct for externalities, to create an environment where individuals and corporations have the freedom to create wealth. The government has to be an enabler in the process of wealth generation, not an inhibitor that it has been for so long.

The role of the government is to set the rules, not play in the great economic game. Nobel prize-winning economist Douglass C. North noted that “economic history is overwhelmingly a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth.” It is a cautionary observation and clearly underlines what lies at the root of our failure so far in sustaining our economic development: the government has abdicated its primary function of designing the rules and enforcing them fairly, and instead entered the game as a player.

The results of the government’s involvement in production rather than in rule-making and enforcement are plain to see. Just to take a very critical example, consider the generation, transmission, and distribution of electrical power—the life-blood of a healthy economy. Public sector power corporations have let us down. The shortage of power is severe, acute, and chronic. Just in the state of Maharashtra, demand outstrips the supply of 15,000 MW by over 5,000 MW. It is a crisis for consumers, but even more for our industries, the producers of wealth. It raises the production costs of our manufacturers and they are handicapped in the global marketplace.

In an era of globalization and international competition, Indian corporations face challenges that are mainly derived from government interference and control. Indian industry faces an acute shortage of trained human resources. It is regrettably reported that only about a quarter of our college graduates are employable—a sure sign of our failed education system. Once again, the government needlessly prevented the private sector to be in education, and instead took monopoly control of the sector. The results are as could be expected: poor quality, extreme shortages, and high costs.

The production of goods and services is not the job of the government; that is the job of the private sector. By getting into production – too often as a monopolist – the government has demonstrated its abject failure. And this is understandable because governments are not capable of inventiveness, entrepreneurship and innovation; qualities that it does not have and thus cannot compete in the marketplace. By wasting its energies on activities that it has no comparative advantage in, the government has neglected what it is required to do: design the rules and enforce them, and create the environment where contracts can be made and enforced. That failure is as costly – if not more – than the failed attempts by the government to produce goods and services efficiently and in sufficient quantities. Consider the functioning of our legal system, as an example.

Among the institutions of governance are the legislature, the executive, the bureaucracy, and most importantly the judiciary. The statistics of the inadequacy of the judiciary are staggering. There are an estimated over 20,000 cases pending in the Supreme Court, around 3 million in the high courts, and a mind-numbing 22 million cases in the rest of the legal system. There are cases in the high courts which date back to the 1950s. Aside from the deep concern that justice delayed is tantamount to justice denied, the backlog of cases has a detrimental effect on the conducting of business in India. When contracts cannot be enforced, the economy loses from potential trades that do not take place.

The limited liberalization of the economy from the shackles of socialistic control has given us an economy growing at a respectable rate of 7 to 9 percent annually. But unless the governance of the economy is improved, even further liberalization – which is sorely needed – will be insufficient to sustain growth. And if growth is not sustained, the hundreds of millions so long trapped in poverty will not have a reasonable shot at economic emancipation. Let’s consider what needs to be done.

[Continued in Part Teen.]

Author: Atanu Dey

Economist.

7 thoughts on “Fake PM’s Speech — Part Duh”

  1. I have a strong feeling that we need to thank the then PM Narasimha Rao more than Mr. Singh for the liberalization in early nineties. Mr. Singh supposedly moved away from the left but seems closely aligned to retain power. Earlier I had a much higher opinion of this PM, until he became the PM or was offered on a plate and failed to make history.

    Like

  2. While I am all for privatizing utilities cos., I still find it hard to digest how could Mumbai be in such dire state. There was more than 4 hours daily cuts in the suburbs, more than 8 hours in Ambernath, 50kms from Greater Mumbai when I visited in April this year.

    Compare that with Thailand, I live in Bangkok. Another developing nation that has already gone thru a high growth phase. EGAT (Electricity Generation Authority of Thailand) was to be privatized but people protested and stalled it. Even so there is no power cut here, Manufacturing industries are assured of all the power they need. Can you believe, that last year in summer the power in our apt. failed due to the building supply and the management of the apartment gave us free stay in a nearby hotel till the problem was fixed, ie. for 2 nights.

    I think, we the people of India are most to be blamed. We haven’t fixed our govt. yet! nor do we ever feel the sense of responsibility high enough in this regard. How many of us want to fight the elections although we may be ga-ga over Indian democracy and how it has survived.

    We may be very unhappy with this govt and PM, but what is most depressing, what are the choices available to this great nation of over a billion?

    Like

  3. The key phrase here is the “Rule of Law”. While most democracies profess to possess it, history shows that there is a gold mine in undermining the concept.

    Like

  4. Atanu,

    This is only tangentially related to this post. I have two questions:

    1) What do you think of T. T. Ram Mohan’s ideas on higher education in India vide
    The Big Picture ?
    2) Is there a way you can put a check for correct XML in your comments? Your comments RSS feed is broken most of the time because of incorrect XML tags.

    Like

Comments are closed.