The Greatest Challenge: Criminals

The greatest challenge to India’s future is neither infrastructure nor agriculture it is neither poverty nor inequality it is the deterioration in governance that has taken place over the decades. This deterioration is broad based & universal: Civic amenities, publicly provided utilities, public education and health law & order and justice have deteriorated, in some places beyond belief. Both availability and quality continue to decline. The TV image of Delhi slum roads flowing with sewerage during the monsoon five-six years ago captured this most starkly. What one had heard about law & order in Bihar for several decades and began hearing about UP during the last decade, can strike even in Delhi & its suburbs. The lack of interest and motivation to fulfil the basic functions of government is a more fundamental cause than fiscal bankruptcy.
The underlying problem is distorted incentives and the corruption of power. Existing systems have distorted the incentives for working efficiently & productively and for investment & entrepreneurship. In the case of Public servants (bureaucrats & politicians) the dis-incentive is compounded by the imbalance of Power between the State and the Public: Power corrupts and absolute power corrupts absolutely. As the systems of governance deteriorate under rent seeking, rent creation and corruption, the power to do good falls relative to the power to harm. The result is that today, the latter is much greater than the former, so that the rare employee wanting to do good has the dice loaded against him/her.
The insights of modern economics that incentive structures are important for how economic agents behave, were largely ignored in setting up institutions and in devising economic & other policies. The role of moral & social conventions in ensuring respect for and implementation of law was given undue weight. Though post-independence leaders in India were imbued with ideals that defied economic incentives, this has long since ceased to be true. Countries that built institutions and systems with some recognition of economic incentives have sustained good governance much longer. Unfortunately, this was not so in India, so that we are now faced with comprehensive failure of governance.
There are four related and interconnected dimensions of this government failure that are important in determining the new approach to development policy. These are monopolisation of power, employee privatisation of public services, Over-extension of government and Fiscal mismanagement.
Monopolisation of Power
Though the monopolisation of economic power started from the 2nd Plan, the peak period of monopolisation was from the mid-sixties to the mid-seventies. By the eighties it covered every area of economic activity as well as the related institutions and social activity. It involved excessive and oppressive interference in all areas of private activity including for instance ‘co-operatives’ that were supposed to be an alternative form of private activity. As a consequence the innovative potential and productive genius of the people has been stifled.
Employee ‘Privatisation’
Employee Privatisation of Public Services is an extreme form of the principle-agent problem that has been known to economics for some time but has been largely ignored in India. This is the problem of how large institutions, including the political system and government bureaucracies, can ensure that the workers in these institutions follow the goals of the institution. This problem has reached epidemic proportion with perhaps 80% of ‘public servants’ maximising their own personal interests, rather than working for the professed goals of the organisation in which they are employed. The proportion of such people in the upper bureaucracy, which generally constitutes about 2% of the total, may be around one-third and perhaps fall even further in the top most reaches which are much more in the media spot light.
Leviathan Spread Thin
Buchanan’s analysis of government warned us that the government was a Leviathan whose interest was in expanding and spreading over more and more areas. The Indian government is over extended & spread thin over too many areas and doing things that are beyond its capabilities. While extending itself to newer areas of activity, the government took the basic functions of government for granted, giving progressively less attention to them. In a country that invented planning in a market economy in the fifties, this is best illustrated by the absence of even the most elementary planning in digging & re-surfacing of municipal roads. As a result the provision of public goods & services has suffered and their quality has deteriorated. The untreated sewage pouring into lakes in Nainital & Srinagar and the rivers in Himachal Pradesh and other tourist havens, open sewers running along the roads in towns across the nation, the pathetic state of the sewerage system in the cities (even Delhi slums) are only a few examples.
Broadly speaking the government has three broad functions that it must perform for the economy and society. This is the provision of “Public” goods and services, the correction of “externalities” and “social welfare.” The former has been most neglected over the past three decades.
Public Goods
‘Public good,’ is an economic concept with a precise technical definition, one element of which is “non-excludability” and another is “non-rivalry.” The classic ‘public good’ (actually service) is ‘defence’ where exclusion is literally impossible and once provided everybody shares in it. Other services that meet the definition are general administration, the judicial system, police, roads & prevention/control of communicable/epidemic diseases. Though in principle government could charge individuals for the use of local roads it is prohibitively expensive to do so (economic non-excludability). Rural roads, once built satisfy the non-rivalry condition in that they the traffic is very light (and they are thus empty) most of the time. Inter-city roads have very strong element of externality (marginal cost ~ zero relative to average fixed cost), so that they are also considered ‘public goods.’ Similarly public health measures such as public (not individual) supply of clean drinking water, sanitation & sewerage, population control and public education about nutrition, cleanliness etc. correct negative externalities and are accepted as ‘public’ goods. Similarly literacy & basic education have positive externalities for other educated people and can be similarly classified even though it does not meet the exclusion criteria in urban areas. Because of limits to divisibility and the sparseness of population, many basic infrastructure services (drinking water, primary education) in rural areas have very high average fixed costs relative to marginal costs and can be classified as ‘public goods.’
Fifty years after independence the population coverage and the quality of supply of these basic services is pathetic and globally embarrassing. Much more attention, time and funds need to be spent on these basic public goods & services. Government responsibility for supply means that government must provide the required funds but it need not produce all these services.
Regional Inequality
Though poverty has declined over the past decade, it has declined less in the poorer states, because the latter have grown more slowly than the country as a whole, with the result that inter-state inequality has increased. A number of eminent economists have asked us the question, ‘What is the role of the State in dealing with this issue?’ under the proposed paradigm/approach. Our reading of the ground reality is that most of these States are characterised by pervasive government failure. Consequently, ‘the State is part of the problem and may not be part of the solution.’
The senior most officials of one such State govt. admitted in a meeting with peers from Central and State governments that they were not competent to procure excess production or deliver food to the starving. Hearing this from a member of the elite service, an inheritor of the ‘steel frame of India,’ was a shock. Similarly, the top political leadership of one State admitted the existing State machinery could not spend money productively and that it would be very happy if development activities could be carried out by anyone else, including the provider of the funds.
The only solution to this incredible failure of governance is to create alternative non-State institutions within such States to build physical & social infrastructure and carry out development tasks, perhaps including some of the basic functions of governance. There is an even more urgent need than elsewhere to get the stifling hand of government out of the peoples’ business, by downsizing govt and liberalising State laws, rules and procedures, and focussing whatever positive energy the government is able to muster on the ‘basics of governance,’(the provision of “Public” goods and services, the correction of “externalities” and “social welfare)”
The mammoth State of UP will perhaps also have be broken up into (about four) smaller States so that the span of state govt. control is more suited to the provision of basic public services and rural development.
There is an urgent need to strengthen the checks and balances in the political system. Though the framers of our constitution paid a lot of attention to the potential for corruption in the bureaucracy, they made the fatal mistake of assuming that all future elected representatives would incorruptible and self less like those who fought for independence. They could not imagine that the judiciary could also be corrupted.
Criminal Legislators
There is an urgent need for electoral reform to reduce the currently overwhelming incentive for corruption. If the Neta-criminal nexus is not broken a time will come in the not too distant future when it will become virtually impossible to stop the criminalisation of the entire police force. In our view the minimal elements of a solution are, (a) State funding of elections through a matching funds approach. (b) Freedom to companies to donate funds subject to shareholder approval. (c) Transparent accounting and mandatory auditing of the accounts of political parties that receive State or company funds. (d) Mandatory bar to running for any political office by any one against whom criminal charges have been legally framed, (e) Special courts to try politicians/potential candidates against whom such charges have been framed so that those who are the object of motivated/false charges can be tried and cleared quickly.
Police
The police force has over time become an important instrument of political power. The police are therefore no longer an independent instrument for enforcing and upholding the rule of law and for providing personal security to all its citizens. The misuse of police by the political masters for personal ends as well as the use by the police of state power vested in them, for their own personal ends, is not merely a theoretical possibility but a frightening reality. This enormous power of the police to do harm must be checked before it becomes uncontrollable.
A number of commissions from the Dharam Vira commission to the Law Commission have suggested the creation of a buffer between the political bosses and the day-to-day operation of the police. One approach is to set up an autonomous police commission in each state along with open and transparent process for appointing the senior officers of the commission. There is also need for an independent public prosecutor whose job is to take cognisance of, oversee investigation of and prosecute major crimes (e.g. murder, armed robbery/dacoity, kidnapping, rape, police crimes). To ensure accountability to the public, which has become the object of police harassment, each police commission & public prosecutor would be accountable to an oversight committee of representatives from all walks of life (including the administration & judiciary). This would ensure that the police themselves obey the law and the law-breakers among them are given exemplary punishment.
Conclusion
• Reform the Police system by setting up operationally autonomous Police Commission in each State. A Public oversight committee, with representatives of government and prominent citizens, would also be set up to ensure that the police do not misuse their authority and obey the law that they are charged to uphold. The monitoring/oversight committee should have the authority to ensure that any policeman that misuses his position or violates the law is given exemplary punishment.
• Set up a National Legal commission to provide similar oversight over the legal system and the neutrality and probity of judges at different levels.
• Introduce a law to debar those against whom criminal charges have been framed in a court of law from holding or standing for election to a public office, till such time as the person has been acquitted. Set up a special tribunal for expeditiously trying all such cases in which the person wishes to stand for public office or is holding public office at the time of notification of the new law.

High Growth Economies of the 20th Century

The answer to the question, “Which are the best performing countries in the World,” varies with the year, the region and the expert to whom this question is addressed. Till the first half of 1997, the consensus among the cognoscenti would have been that the East and South East Asian “Miracle economies” constitute (with perhaps minor exceptions) the star performers of the world. The “Asian Crises” has swept away the paradigm of the “Asian Miracle,” shattering this consensus. Within the limits imposed by availability of internationally comparable data, an October 1999 paper by the author identified the fastest growing economies of the last two decades of the 20th century [http://finance.nic.in/avirmani]. This article presents these star performers.
GDP Growth Trends: End 20th Century
Table 1 shows the ten fastest growing medium-large countries in the world during the last two decades of the 20th century. Among the top 10 there are three broad growth clusters: There are four countries having a trend growth rate of between 5.3% and 5.7%, three between 6% and 6.2% and four having a growth rate of 6.9% or higher. It is interesting that even if we make a downward adjustment of 2% points in the average growth rate of China it would still be the best performer over this period. Out of the 10 High Performing East Asian economies (HPEs), referred to in the World Bank’s Asian Miracle study (1993) only one (Japan) has clearly dropped out of the top 10. Given its poor performance in the nineties, Japan is no longer among the high performers.
Many observers of ‘emerging market’ economies were surprised by the absence of their favoured countries from this list of high growth countries. The greatest surprise was the appearance of India among the top ten performers. Most observers would have stated that India’s performance ranks at the bottom third or at best the mid-range of the entire set of medium-large countries. A few may have been willing to concede that India may have performed a little better during part of the nineties to reach the top half or top third. It would be difficult to find (in 1998) more than a handful of people who could have imagined that for a continuous period of two decades India was the sixth fastest growing economy in the World. One valid reaction of sceptics would be that this is all very well for the GDP growth rate, but India could not possibly have performed so well in terms of growth in per capita GDP. We return to this aspect below.
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Table 1: Growth Trends for Medium-Large Countries: 1980-2000 (est)

Country GDP Per Capita GDP
Gr. Trend Rank Gr. trend Rank

China 10.1(8.1) 1 8.8(6.8)% 1
Korea, Rep. 7.7 2 6.6% 2
Thailand 7.1 3 5.7% 3
Singapore 6.9 4 5.1% 4
Ireland 5.3 10 4.9% 5
India 6.0 6 4.1% 6
Vietnam 6.2 5 4.1% 7
Chile 5.6 9 4.0% 8
Indonesia 5.7 8 3.9% 9
Hong Kong 5.3 11 3.7% 10
Malaysia 6.0 7 3.5% 11
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Notes:
1) The growth trend for 1980-98 is a log average of the growth trends for 1980-90 &1990-98, from WDR 1999-2000.
2) Population growth trends from WDR 1998-1999 and projections.
3) Forecasts of 1999 and 2000 are from ADB AEO 1999, IMF WEO where available.
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Chile is the only country in this group that is not located in Asia. Those dealing with Latin America may be surprised that no other country from their region is represented, while those outside the region may be surprised that it falls in the top ten. The numerous international fans of Chile’s policies may be surprised that India’s trend growth rate of GDP was higher than that of Chile. Those outside Asia may be equally surprised to find Vietnam among the top five performers. Vietnam, India and Chile performed better than Hong Kong, which just makes it into the list at the number 11 position.
Another noteworthy fact about these three countries is that each of them started economic reforms during the eighties and continued it in the nineties. Though the popular perception is that India started its reforms in the nineties, Virmani (1989) had shown that there was a significant improvement (break) in India’s growth performance in the eighties, from its dismal performance from the mid-sixties to the end of the seventies. This paper had also argued that this was due to economic reforms undertaken during the eighties, which started (albeit slowly) reversing the policy distortions introduced in the seventies.
Per Capita GDP Growth
Per capita GDP growth is a better measure of economic performance, viewed from the perspective of the welfare of a country’s people. If both economy and population grow rapidly, the former may be partly a consequence of the latter, while the welfare of the public may not have improved much because of poor growth of per capita income. Table 1 also shows the ranking of medium-large countries in terms of the trend rate of growth of per capita income. For the period 1980-2000 the ranking of the top four is the same as the one for GDP growth. China is the top performer with a trend growth rate of per capita GDP of 8.8% (table 1). If we adjust its growth rate by 2%, then it and S. Korea form one cluster with a growth rate in the range of 6.6% to 6.8%. Thailand is the only country with a per capita GDP growth between 5.5% and 6.5%. The third cluster with a per capita income growth of 4.5% to 5.5%, which includes Singapore, has an interesting addition. Ireland is the fifth fastest growing economy in the world in terms of per capita GDP (10th in GDP growth). There is a fourth cluster with a per capita growth around 4% (3.5% to 4.5%) containing all the other high growth economies. India is the fastest growing economy within this cluster, with its overall rank unchanged at number 6.
Malaysia’s performance appears much worse in terms of per capita income than it does in terms of GDP growth and both Vietnam & Indonesia move down in the ranking. The ranking of Chile and Hong Kong is on the other hand better in terms of per capita GDP than it is for GDP growth. Out of the 10 High Performing East Asian economies (HPEs), referred to in the World Bank’s Asian Miracle study (1993) Malaysia at 11th place would therefore clearly be the second country from among the HPEs to drop out of the set of star performers.
Thus the star performers of the last two decades of the 20th century are China, S. Korea, Thailand, Singapore Ireland, India, Vietnam, Chile, Indonesia, and Hong Kong. Of these only two are from outside Asia, while none are from East Europe. The representation from Latin America and E. Europe is unchanged even when we bring in the next tier of medium-large countries, which have a per capita growth trend of around 3% (2.7% to 3.3%). These are Sri Lanka, Norway, Turkey and Portugal. Thus out of the 15 fastest growing economies during the last two decades of the 20th century 11 were from Asia.