For years economists and sociologists have been looking at why some nations succeed while others fail. Over time they have theorized several reasons like geography, climate, and culture all of which surely play a role in how a nation shapes up but I believe Darrun Acemoglu and Robinson have hit the hammer on the head and identified the most important factor behind the socio-economic success of a nation — ‘institutions.’
They believe that it’s the ‘institutions’ that in the long term shape the economic future of a country. Countries with good economic institutions prosper while the ones without fail. In the economic sphere, they talk about inclusive economic institutions, that enforce property rights, have judicial and contracting institutions that uphold contracts and enable individuals to enter mutually beneficial agreements, and provide a level playing field by providing regulations that protect individuals and provide public goods in the form of healthcare and education that help people take part in the economic game.
The above graph shows clearly how institutions impact the economy. South Korea, Botswana, and DRC all had really low GDP per capita however after the 70’s the economies of South Korea and Botswana diverged from the DRC and experienced an economic boom due to the development of inclusive institutions. Venezuela on the other hand despite having hit the geographical lottery with its vast oil reserves has not been able to perform as well due to its exclusive political and economic institutions.
The economic institutions of a country are primarily dictated by the nature of its political institutions. Extractive political institutions implement policies that benefit the ruling class and tend not to go for economic inclusiveness because that could lead to the formation of a powerful business class who could then threaten to change the political-power dynamics.
Thus, there exists a very strong correlation between economic and political institutions.
A clear example of this would be the stories of two richest men on Earth, Bill Gates and Carlos Slim. How both of these men made their money shows us why the US is more economically successful than Mexico.
Mexican institutions allowed Slim to make his fortune by monopolizing the telecommunications business through his political links, as a consequence of which, today Mexico loses 2% of its GDP every year in the form of dead-weight losses. Whereas American institutions firstly allowed an environment that enabled Bill Gates to innovate and develop Microsoft, and subsequently stopped him from monopolizing when the U.S. Department of Justice filed a civic suit against the Microsoft Corporation on May 8, 1998, claiming that Microsoft had abused its monopoly.
This shows how while one set of institutions creates incentives for innovation and competition, the other creates incentives for monopolies and corruption. We can now see how for a country to be successful in the long run, it must have inclusive institutions which then create positive incentives in society and lead to economic progress.
The question now is, did India get the basics right?
Luckily India’s founding fathers bequeathed a strong set of institutions, much stronger than the average country.
On the political front — The Congress party held power without a break at the center for decades which may have been useful in providing the country with the political stability any newly formed country urgently needs. This however stopped in the ’70s when Indira Gandhi’s government fell and since then multiple parties have become dominant forces in Indian politics leading to greater political inclusivity.
On the economic front — Initially, India’s socialist and tight-leashed regulatory policies prevented it from reaching its economic potential. This changed in the ’90s when India opened its economy and since then her economic institutions have also taken a positive turn.
While India may have gotten the basics right, the institutions which it directly inherited from the Brits have developed massive inefficiencies which India is yet to rectify and I believe one of the weakest links of the chain is its bureaucracy.
The IAS is often lauded as the country’s “steel frame”, yet the Indian bureaucracy was adjudged Asia’s most inefficient by the Political and Economic Risk Consultancy, Hong Kong.
Though entry into India’s civil services is highly competitive, perverse incentives, lack of specialization, and political interference have eroded their effectiveness. It is thus imperative to revamp the IAS. We need to attract the best talent of India, whether staying in India or abroad, irrespective of age and years of service, into civil services. Many eminent Indians want to contribute to the growth of the nation however there are no avenues for them to join the civil services after they have passed a certain age. The examination pattern also needs a revamp as it is really not testing a candidate on all the qualities which a civil servant must possess. In addition, fast-track promotions for promising young bureaucrats, transparency in decision-making, and less political intervention are the other steps that we need to take.
Another lacuna of our political system is nepotism. Many political parties are being led by sons and daughters of earlier political leaders, many of whom have no job experience and are far away from ground realities. This in turn has made it difficult for regular citizens to participate in the political process. Every political system has tendencies to develop such exclusionary forces and currently, our institutions are failing to control them.
In a post-COVID world, the biggest challenge which our country will face is how to control unemployment. The COVID crisis has changed the world in many ways, work from home has been widely adopted and is not likely to change hereafter. This is going to make many people who were employed as help in offices, cab drivers, and people carrying out minor errands look for alternative work. In the absence of large-scale manufacturing jobs like in China, we need to develop alternative employment avenues. In India, such jobs can be generated in the food, tourism, sports industries, etc. As per a study, if 2000 families eat even one meal per week in a restaurant, about 100 jobs are created. We should encourage people to go out and eat and the government should provide incentives for developing such eateries all over the country. Approx. one crore people can be employed in the restaurant industry alone with such endeavors. Similar is the case with tourism, adventure, and other sports-related industries.
To quote Abraham Lincoln — “It is with your aid, as the people, that I think we shall be able to preserve — not the country, for the country will preserve itself, but the institutions of the country — those institutions which have made us free, intelligent and happy — the freest, the most intelligent, and the happiest people on the globe.”