The always excellent M.H Khan writes of Gunnar Myrdal's 'soft state' thesis as follows-
One of Myrdal’s most influential observations was that states in South Asia were ‘soft’ and could not enforce social discipline.
Indira Gandhi's Emergency showed that the Indian State was well hard. Ted Heath's Emergency in the UK failed miserably. Indira didn't just crush all dissent over-night, she showed she could do forcible sterilization.
Unlike East Asia- where there was family registration and, in the case of China, an internal passport system, as well as a history of collective punishment which militated for filial piety and the appearance of 'social discipline'- South Asia relied more on local authorities and a type of communal self-policing. Thus, the foundation of the criminal justice system is the punchnama- i.e. testimony of 5 respectable men of the village or neighbourhood. The magistrate was not the inquisitor uncovering facts. The facts were presented to him and experts advised on appropriate sentencing.
Caste was a sort of Trade Unionism which established a degree of countervailing power. Society had a bias towards harmonious functioning and accommodation. East Asia could see big Revolutions. During the Meiji Restoration, Buddhist monks and temples (which the Shogun had used to run the Household Registration system) were attacked. China, more dramatically, had a history of peasant uprisings leading to a former peasant becoming Emperor ( Han & Ming Dynasties). Mao, of course, was the son of a prosperous peasant. Interestingly, it was the kulaks who fed his forces before he came to power.
Political leaders tolerated social indiscipline and inefficiency on the grounds that this was
how the country had always been. Also they were pretty undisciplined and inefficient themselves.
part of ‘democratic planning’ while engaging in corruption themselves.
Political leaders were either senile or extremely stupid and lazy. The system worked well enough for them. They didn't give a fuck about anybody else. It is said 'the best of monopoly profits is a quiet life'. In a stagnant economy, few have very much to do. Even the employed are under unemployed.
Myrdal argued that this regressive collective behaviour was the product of attitudes, cultures, and institutions.
Socialist policies were preventing law abiding people from setting up industries and transferring rural girls into giant factory dormitories. Without industrialisation, the habitus of the people was difficult to change. The legal hurdles to sacking workers or closing down loss-making units meant that the work culture in most factories tended to deteriorate.
Myrdal, fool that he was, didn't get that Socialism was the problem in India. He believed more Socialism was the solution!
He was describing something important, but it was an incomplete observation. The soft states were only ‘soft’ in some areas. They were very hard in others, for instance in repressing communists or secessionists.
not to mention forcibly sterilizing people
The weak implementation of some institutions and policies is more likely to have been due to the interests of powerful organizations in specific countries and sectors rather than a general feature of their cultures and attitudes.
Sadly, commercial organisations weren't powerful at all. They couldn't even sack workers who refused to do any work.
The ‘political settlement’ describes the distribution of power across different types of organizations.
It is irrelevant. If the courts are useless, you hire goons to get your work done. At first politicians used criminals. Then criminals started getting elected on their own.
The distribution of organizational power can vary greatly across countries and sectors, and over time, and can help to explain significant differences in institutional outcomes and behavioural patterns.
Only incentives matter. If they are strong enough, there is a Coasian solution which, however, may be illegal. The problem in India was that collective action problems weren't being tackled such that external economies became available. However if productivity was high enough (e.g in IT) , there was a workaround. Low productivity remains a problem. Even with very low wages, per unit labour cost is too high. This leads to a reswitching paradox- expensive capital was and is substituted for cheap labour.
At one time, we might have blamed militant unions but it is now clear that infrastructure is the bigger bottleneck.
The relationship between institutions and political settlements can be explored through the lens of industrial policy institutions, which played an important role in many Asian countries.
Sadly, Nehru- to the great satisfaction of the Myrdals- chose a particularly stupid type of Socialist 'perspective' planning. I suppose, his intention was to concentrate economic power in the hands of the Planning Commission- which the PM controlled- and to reduce the independence of the big industrial houses which had financed the Congress. At a later point, after Indira nationalised most banks, the industrialist was playing with 'house money'- i.e. money borrowed from the Govt. banks. The smart ones used 'pyramiding' to retain control rights without much of their own 'skin in the game'. Meanwhile they offshored their assets in various ways. Absurdly, a lot of big Indian contracts are under foreign jurisdiction- i.e. the notoriously slow Indian judiciary is disntermediated.
Success with industrialization depended
on getting rural girls into giant factory dormitories
not just on the country’s initial conditions, but also on the implementation of transformative industrial policy institutions.
But you had to start with labout intensive light manufacturing.
Successful industrial policy in Taiwan and South Korea in the 1950s and 1960s involved the allocation of resources to new firms and sectors as conditional policy rents.
Both were dictatorships which faced a military threat. They feared the withdrawal of US support and thus sought to mobilize what resources they had (mainly cheap labour) to go in for export led growth. The big difference between Japan and India in the Fifties & Sixties, is that the Japanese MIT used scarce foreign exchange to invest in areas where exports could take off- i.e. the forex position would improve. India went in the other direction.
The aim was to accelerate technology adoption and learning-by-doing to raise productivity and achieve competitiveness in new sectors.
This was done by investing in what would give the biggest return. The middle class was pushed into STEM subjects. Lawyers were few and far between. In South Korea, in 1980, there were less than a thousand lawyers for a population. In Calcutta, the number of new lawyers registering in 1980 was over a thousand.
The critical condition for success, as developmental state theorists later pointed out, was that industrial policy agencies could effectively discipline the recipients of policy rents.
But there was a big incentive to embrace that discipline. In India everybody new the regulations were a self-contradictory bundle of anachronistic or+ virtue signalling shite. To comply with one rule you had to break two others.
This capability allowed mistakes to be corrected and ensured that productivity growth was rapid.
South Korea & Taiwan faced an existential threat. In India you just needed to be slightly better than your adversary in the electons.
In China in the 1980s, the industrial policy was different but the enforcement of conditions ensuring productivity growth was again effective, achieving dramatic outcomes.
Chairman Deng said 'to get rich is glorious!' However, it was the agricultural sector which first began growing rapidly. It is said that after the Tianamen protests, the Government focussed on the urban population. People from the Chinese diaspora played a great role in China's rapid rise. India liberalised a little later but, Edwin Lim (a World Bank official who came to India after a stint in China) said that the 'activists' and 'public intellectuals' gained more by preventing development than the Government's officials and advisors.
At the other end of the spectrum were countries in South Asia in the 1960s where the beneficiaries of industrial policy rents were much more difficult to discipline.
No. They kept losing incentives or rather faced growing disincentives. At that time, industrial unrest was a big factor. Militant Communists drove a lot of industry out of West Bengal in the late Sixties and Seventies. A trade unionist, Datta Samant, destroyed the textile industry in Mumbai in the Eighties. However, where the state government beat the shit out of troublemakers in the factories- e.g. in Haryana- industries could flourish. Gujarat was a special case. Under Modi it had balanced growth of industry and agriculture without any coercive means being resorted to. On the other hand, Muslim gangsters were shot out of hand. Sonioji weeks every time she recalls this.
Powerfully connected business houses, and groups linked to them, captured policy rents and could not be disciplined.
The Government wasn't saying 'export more!'. It was saying 'why have you produced more than your quota? Give me one good reason why we should not send you to jail.'
The fact is, industrialists want to produce more & get economies of scope & scale. They want to climb the value chain. What they don't want to do is go to jail because they produced more than their license permitted.
Not surprisingly, these countries achieved less significant industrial outcomes.
They faced no existential threat.
Southeast Asian countries were somewhere in between and achieved moderate success.
More particularly if their Chinese communities were permitted to grow richer. Myanmar, sadly, pursued even crazier policies than India and ended up
However, the 1980s saw the beginning of a different type of industrialization in South Asia, led by sectors like automobiles and pharmaceuticals in India and garments and textiles in Bangladesh.
Bangladesh, under Ershad, started doing privatization. It rose because it got more and more rural girls into factories. Thus it achieved demographic transition and overtook Pakistan in terms of per capita income.
Institutions and policies successfully supported capability development in these sectors because policy rents were now delivered in ways that could not be unproductively captured, even in these political settlements.
It isn't rent capture that is the problem. It is what is done with the rent. If it is re-invested, then the Nation prospers. Don't forget, economic rent accrues where there is non-convexity (economies of scale) and super-modularity (complementary goods- e.g. increased demand for services when manufacturing wages and profits rise)
Developmental state institutions worked in North East Asia and China
only if they did sensible things.
not because these countries already had market-supporting behavioural norms, nor because they were less corrupt or otherwise better at following market rules.
It is said that China is run by engineers not lawyers. Engineers are interested in efficiency and getting more output with less resources. Lawyers are interested in expanding the rule set even if this results in incentive incompatibility.
If the appropriate rights, norms, and behaviour already existed, social transformations would not be required (Khan 2004, 2007).
Social transformation happens through mimetic effects regardless of norms and behaviours. That's why, despite being a fat fuck, I wear skinny jeans rather than a dhoti.
Transformational policies are required precisely because pre-existing rights and institutions have to change and new capabilities developed.
Policies don't matter. Incentives do. If policies change the incentive matrix then there is likely to be an 'excess burden'. However, if profits are reinvested & tax revenue funds infrastructure expansion, the dynamic benefit outweighs the allocative cost. The other point is that disintermediation can occur leaving policy ineffective. What is crucial is expectations.
They inevitably disrupt pre-existing rights and require the creation of many rents as important market failures are targeted.
Disintermediation is a Coasian solution. That's why property rights or Government policy may not have changed even though the whole Society has been transformed.
Transformational institutions are successful when they are effective in changing rights and behaviour to achieve more productive societies.
Jail is a very transformational institution. If there is a high probability that you will soon be sent there if you break the law, you change your life-style. This can raise productivity.
For this to happen the enforcement of these institutions has to be aligned with the interests of the powerful
You can beat, kill and incarcerate the powerful. This makes them as weak as a kitten. Enforcement is easy if the mechanism is 'incentive compatible'. Indeed, 'self-enforcement' may occur.
Myrdal posed a question that continues to motivate institutional analysis: why do people not respond to incentives in the same way everywhere (Myrdal 1968: 16–24)?
Because they have different habitus and mimetic targets. This means the psychic reward or punishment is different hence the incentive matrix is different.
Myrdal rightly criticized economists who assume that responses to economic incentives will be the same everywhere. This was not the case, he argued, because behavioural norms may prevent individuals from responding rationally to economic incentives.
But, at the margin, it will happen and then Tardean mimetics takes over. People want to emulate those like themselves who have gotten rich. We may say, Taiwan and South Korea took Japan as their mimetic target. North Korea looked to China and the Soviet Union.
He called these patterns of behaviour ‘institutions’, and in India, Myrdal’s main case study, the regressive institutions he identified included the caste system,
Japa had untouchability.
the taboo on cow slaughter,
which can be got around. Anyway, people can substitute buffalos for cows.
dysfunctional pre-capitalist structures of land rights,
England has this when its industrial revolution took off.
and the management of firms based on caste, family, and ethnic allegiances.
Family run firms can run into problems in the third or fourth generation. But, they can be very effective in the first and second generation. Caste can be economically useful. Look at the Patels of Gujarat or the Nadars of Tamil Nadu.
What Myrdal describes as institutions include what we would today call formal institutions like property rights or laws against cow slaughter, as well as informal institutions like caste, that are either self-enforced or enforced by informal extra-legal processes (North 1990). Myrdal’s argument was that formal and informal institutions reinforce each other and are therefore difficult to change.
They change at the margin and those who prosper most set off a run-away process of Tardean emulation.
Their persistence can prevent the emergence of the behavioural patterns necessary for a modern market economy,
including efficiency, diligence, flexibility, enterprise, and even honesty.
Myrdal knew that Nehru's India was pursuing anti-market Socialist policies. There is no point being diligent if this doesn't make you better off.
He concluded that regressive behavioural regularities needed to change, but this was
only likely if compulsion was used to change these attitudes.
Like his son said, the guy was a fascist. He and his wife supported forcible sterilization for eugenic reasons in Sweden.
But the ‘soft’ South
Asian states were unable or unwilling to impose any social discipline on citizens
(Myrdal 1968: 60–3).
They weren't utterly heartless. If you have lots of semi starved people sleeping on pavements, the urban masses will be thankful for what little they have.
His response was to propose a big push to change institutions and attitudes
i.e. have a Revolution in which millions were slaughtered followed by a man-made famine to cow the rural masses.
because ‘[i]t is often not more difficult, but easier, to cause a
big change rapidly than a small change gradually’ (Myrdal 1968: 115).
The problem with a Revolution is that sooner or later a General takes over unless, as in the Soviet Union, it is a bureaucrat who can create vast Gulags.
But he did
not make clear where he thought such a push would come from.
The Army. Some bunch of Commie junior officers kill their superiors and capture the Radio Station & the President's mansion.
The parallels with the
later institutional economics of North and his followers are obvious. The argument begins with formal institutions and informal behavioural norms. In Asia
these were often regressive, with roots going back to pre-colonial and colonial
periods, which Myrdal loosely describes as ‘feudal’.
Europe was more genuinely feudal. Yet it industrialised. At one time, it was thought that universal education was the key. Sadly, in India, that would just mean virtually universal unemployability.
These pre-existing institutions
include dysfunctional property rights over land,
The problem was fragmentation of land holdings. Myrdal rightly crticised Bhoodan but seems not to have been aware that Colonial laws actually made it easy for the Executive to redistribute land. The problem was that politicians had an incentive to tie the beneficiaries of land reform to the land so as to preserve a vote-bank.
hierarchical caste systems, or
other social attitudes that were inimical to the effective operation of a capitalist
market economy.
The 'Marginal Revolution' emphasises that what happens at the margin determines outcomes. If the smartest people are going into industry, industry is likely to grow. If they are going into Development Econ the country is fucked.
Individuals and firms could not respond flexibly to price signals
or market opportunities in such a context.
Because of Expectations. But if there are impediments to reallocating resources, there is a good chance that this is regret minimizing.
To deal with the economic underperformance that followed, states found it necessary to operate a raft of discretionary
top-down controls like licensing economic activities, providing subsidies, protecting markets, and so on.
Not in India. The Economy was doing quite well when Nehru decided to go in for some particularly stupid sort of Socialism. I think 'perspective planning' was a plan to eventually change how people saw things. In other words, it wasn't Economic but Psychological or Idealogical. Nehru, in his autobiography, said he wanted to Brahminise India which the Brits, a nation of shopkeepers, had turned into a bania nation. Perhaps 'perspective planning' would mean Indians would come to adopt a Brahminical perspective such that the things of this world matter less and less.
The result was the resolution of some problems but the
creation of new inefficiencies, since these interventions too could not be properly
policed or enforced.
They could but this would just mean bigger losses.
We would today describe this as rent creation and corruption
The purpose was to harass and cow down the industrialists and business houses.
Anticipating subsequent debates over rents, rent-seeking, and governance, Myrdal argued that these interventions created ‘extraordinarily high profits’ (rents) for
privileged companies in the private sector (Myrdal 1968: 926).
This was common knowledge. Sadly, because economies of scope and scale were not attained and the domestic market was stagnant, these 'privileged' companies stagnated in the next decade. There had always been a question about the quality of Indian entrepreneurship. It appeared to decline over the course of the Sixties and Seventies. Liberalisation caused several big business houses to disappear- though family feuds often played a part.
Given the low
social discipline, the interventions induced further rule violations and regressive
behaviour, completing the loop in Figure 13.1 (Myrdal 1968: 901–35).
How does 'social discipline' feature? The fact is enforcement was weak and the 1947 FERA act had plnety of loopholes. In the Seventies enforcement was beefed up but 'hawala' networks became more entrenched.
Myrdal’s analysis anticipated modern institutional analysis whose logical
structure is quite similar. It also anticipated the literature on how corrections to
market failures can lead to government failures (Bhagwati 1982, 1983; Krueger
1990).
The difference was that Myrdal thought India should be even more Socialist. Why not kill kulaks and have a Cultural Revolution?
Myrdal sometimes argues that regressive institutions persisted because
powerful interests benefitted from them,
Whereas the truth is insitutions were shitty because incentives to make them less shitty were lacking. It may be, in Sweden that industrialists have a lot of power relative to the Prime Minister. Such was not the case in Nehru or Indira's India.
but at other times he argues that they
reflected the values and cultures of these societies.
'Institutions' is code for Race. You can't say 'darkies are shit'. You can say 'Institutions are shit in country x. I have no idea whether the people of that country are darkies. The truth is, I don't see colour. Anyway, some of my best friends have sun-beds and thus are quite tanned.'
In the early part of his work, it
appears that regressive institutions are protected by powerful interests. But later
Myrdal argues that gradual changes were possible in Europe because reforms
were aligned with the values of Western civilization,
coz they were White
while in South Asia,
which is full of darkies
regressive
social behaviour, stratification, and attitudes were sanctioned by old cultures and
popular religion, and so gradual reform was more likely to be overturned (Myrdal
1968: 2114–15).
Some countries took the Soviet Union or Communist China as their mimetic target. Those who copied Japan had a different trajectory.
The distinction between the two positions is important for Myrdal’s justification of radical change.
Scrap stupid Socialist policies and virtue signalling or paternalistic laws. Let productivity rise and use tax revenue for infrastructure investment. If a fucking Swedish meatball turns up saying he is a Development Economist, shit on him and chase him away.
The interests of the powerful and the evolution of cultures can clearly interact.
Power is about displacing rivals. If you try to change 'culture' you might yourself be displaced. On the other hand, Tardean mimetics can work at the level of the State. But cultural adoption of this type may be only skin deep. Moreover, it may be overturned. A hundred years ago, a King of Afghanistan tried to get his people to adopt Western dress and sport moustaches rather than beards. Now, the Taliban are in power. Turbans and beards are de rigueur.
Powerful groups can be expected to invest in cultures that support their interests, but these can also become widely shared and provide affirmation and identity to many other groups.
Members of a powerful group may have very different cultural or religious allegiances. Speaking generally, culture and religion are public goods- i.e. 'non rival' & (to a lesser extent) 'non excludable'. Power or its lack does not matter.
A wide range of groups can then use cultural and identity symbols in their own mobilizations. It may therefore appear that culture has an independent existence because it does not mechanically reflect the interests of particular groups. Nevertheless, culture persists because a variety of groups invest in its reproduction
by having sex and reproducing
and it is therefore important to assess the dominant direction of causality over time.
It really isn't. I suppose what Khan is getting at is that South Asian countries have become more religious over the last few decades. But that is because Religion is a service industry with high Income elasticity of Demand. It isn't the case that 'powerful' people are feeding the opium of Religion to the masses.
Myrdal’s earlier argument that regressive institutions and attitudes are protected by configurations of interests is more in line with my own thinking....
Why can't powerful people in South Asia promote Lesbianism instead of religion?
If on the other hand, cultures and norms persist entirely independently because of mental models, we are in a thicker soup. Much later, Douglass North came to a similar impasse when he was trying to explain the persistence of dysfunctional institutions. North resisted explanations based on the distribution of power, and so he had to fall back on mental models to explain institutional stagnation by a process of exclusion (North 1995). The problem is that this can easily descend into a genetic explanation
i.e. 'darkies are shit'.
because we then have to explain why some population groups fail to update or reject their dysfunctional mental models in the light of evidence.
There is little point updating a mental model if you live in a shithole which might get shittier yet.
Fortunately, North abandoned this line of argument before it drove him in that direction. This is not to say that values, cultures, or religions never have independent effects on the evolution of institutions and organizations. Cultures and norms can influence how different groups across society identify themselves and the narratives they use to mobilize their supporters in conflicts with other groups. As a result, the evolution of organizational power and institutions can be affected by culture and history. Myrdal’s warnings about the regressive role of culture and religion can hardly be ignored in the context of the backward slide towards populism and identity politics in large parts of contemporary South Asia and beyond.
Even Myrdal would not have recommended trying to eradicate Islam. The Khalqis, in Afghanistan, tried. They failed miserably.
. If we recognize the possibility of
value-enhancing rents,
taxes are such a rent. Higher taxes could lead to higher income such that the burden of the tax is constant or falls. 'Tudor monopolies' may be a good thing is profits are invested wisely.
rent-seeking and corruption can be associated with very different development outcomes (Khan 2000a, 2000b, 2006).
This is also the case where there are no rents.
Similarly, the mainstream
work on property rights and formal institutions ignored the fact that capitalist
development requires the destruction of many pre-existing rights and institutions.
Not as much as Socialism. Speaking generally, the law is flexible enough to create workarounds for feudal laws. Ultimately, if the remedy is too costly, the underlying right will de facto disappear.
Developing societies are unlikely to have well-enforced formal institutions
the may have inherited very good ones from their Colonial masters.
when
their pre-existing rights are going through huge disruptions. Using the institutions
and governance structures of advanced countries as the benchmark for developing
countries is therefore deeply problematic not only in Myrdal, but also in later
authors like Acemoglu and Robinson (Acemoglu et al. 2001; Khan 2012).
Not in the case of Singapore. Brexit was about creating Singapore-on-Thames. Sadly, it isn't working.
Acemoglu and Robinson’s (2000, 2012) analysis of power, and their argument
that inclusive political institutions empower market-supporting groups,
Indian democracy was inclusive. The son of a peasant or a chai-wallah could rise all the way to the top.
is also
based on an inappropriate generalization. Advanced countries are advanced
because they have many productive organizations that can benefit from market
institutions.
They can benefit from sophisticated financial markets, more particularly if their shares are trading at a premium.
Market-restricting monopolies benefit small groups but hurt the
majority.
Unless there are economies of scope and scale.
Inclusive political institutions in such a context can plausibly empower
the productive majority to resist monopolists.
Because Joe Lunch-pail is an expert on Competition policy- right?
The problem of power is more
complex in developing countries where the majority may not necessarily support
market institutions because they do not yet have the productive capabilities to
benefit from them.
The majority don't think or talk like Economists. They may vote for a guy who says he will lower taxes and increase welfare spending even if this is bound to cause infation.
Instead, large groups can be mobilized with populist or identity politics to demand value-reducing rents or to block the productive restructuring of property rights.
In India, you can always rent a big mob to demand anything at all. However, it is the 'activists' (andalonjivis) who pose the biggest problem.
In these contexts, inclusive political institutions do not
necessarily empower market-supporting groups.
But a Thatcher or a Reagan can emerge.
This is not an argument against
inclusive politics, because restricting rent-seeking opportunities in these contexts
may sometimes trigger violence and more regressive results. The challenge is to
devise incremental institutional changes that can nudge developing societies
towards better evolutionary paths.
New technology can be very helpful. It allows a developing country to 'leapfrog' over a historically very expensive type of infrastructure.
Marxist historians of capitalist transitions in Europe have also identified the importance of distributions of power for understanding the emergence and effectiveness of institutions (Brenner 1976, 1985; Wood 2002).
Sadly, they understand shit.
The puzzle they addressed was that the first transition to capitalism was in England rather than in more commercialized or more culturally sophisticated parts of Europe.
Marx thought Holland was ahead. Reclamation of land from the sea led to non-feudal land title in the 12th and 13th century. However, de jure, England got rid of it earlier
The Italian city states, the Baltic states, or the Netherlands were more commercialized centres of long-distance trade.
England had the Channel. This meant it could rely on sea power to stay safe. Also, it had Stuart monarchs who had a soft spot for Catholicism. This is why the country wanted to keep the profits from Naval hegemony in private hands.
The Renaissance was centred in continental Europe. England’s advantage could not have been its more advanced culture or its market institutions.
After the Black Death serdom, de facto, disappeared. Since no part of England is more than 70 miles from the sea, there was greater connectivity. The country has not suffered a famine since 1620.
Rather, these theorists argued, the first capitalist transformation in England was the outcome of a fortuitous balance of power between peasants, lords, and monarchs that allowed lords to enclose the commons,
yet prevented them from reducing the peasantry to serfdom as in Eastern Europe and Russia.
This is extraordinarily ignorant. England did have serfdom but de jure got rid of it just as Russia began to go the other way. Incidentally, the commons were, de jure, manorial possessions under the Crown. Regulation of these spaces was managed locally through manorial courts, and rights were formally protected and limited by historic agreements such as the Charter of the Forest (1217) and the Statute of Merton (1235), which allowed lords to enclose parts of the commons only under specific conditions. Interestingly, the Black Death, over a hundred years later, permitted Lords to enclose more land.
The Enclosures gradually privatized common village lands over several centuries, but allowed richer peasants to become capitalist tenant farmers by leasing land from enclosing landlords. This created a landless proletariat and capitalist farmers, but also new inequalities which, far from being aligned with ‘Western values’, were strongly resisted by the Church (Tawney 1938).
Then the Catholic Church was chased away. Its lands went to the new gentry.
Nevertheless, the emergent agrarian capitalism drove innovation and productivity growth. Intense competition between capitalist farmers who had to raise productivity to pay rising rents to landlords led both to the development of technology and the imposition of discipline on workers who adhered to new rules because being landless they had no exit options.
If able-bodied, they were forced to work. There were legally mandated wage caps though this was often circumvented. The Poor Law was actually quite coercive.
The configuration of power was therefore critical for the English transformation,
Though there were secular socio-economic trends even though 'configurations of power' kept changing from century to century.
rather than a hard state or specific cultures and values, though cultural and other factors may have played some role.
What mattered was the navy. Since England had the Channel, it could focus on the Navy which meant a global market supporting innovation & the gaining of economies of scope and scale.
Similar institutions did not emerge in much of Europe till military competition with Britain persuaded Bismarck, Napoleon, and other state leaders to organize political coalitions to push through institutional transformations from above that achieved capitalist transitions.
The French Revolution, exported by Napoleon, ended feudal law codes. Prussia, gaining the Rhineland, promoted the Zollverein (a free internal market) Von Motz was its architect. Bismark was a kid at that time.
Similar state-led transitions began in Asia with the Meiji revolution in Japan in the nineteenth century, which foreshadowed transitions in Taiwan and South Korea in the twentieth. In each case, the transition was driven by different types of state and non-state organizations but, in all cases,
people were sick and tired of what went before. China had a Revolution. Sadly, the Army Chief decided to crown himself Emperor and thus China experienced a period of War Lordism before the Japanese invaded.
a specific distribution of organizational power
didn't matter at all. There was an existential threat. Either Japan modernised or it would go the way of South and South East Asia.
enabled outcomes that led to the emergence of new institutions
they were copied directly. This was Tardean mimetics at the national level.
and more dynamic societies. These institutional changes were mostly gradual rather than revolutionary breaks with pre-existing cultures
No. In East Asia there were dramatic breaks. India could be said to have gradually evolved in to a democratic Republic.
and norms, though the latter changed over time as production systems and power configurations changed. In every case, there was resistance from losers, but the losers were typically not the small groups of privileged monopolists, as in Acemoglu and Robinson’s analysis. The resistance to the Enclosures in Britain came from peasants.
There were a peasant rebellion in the 14th century (John Ball) and one in the 15th century (Jack Cade) but after Kett's rebellion in 1549 there were no more rebellions though local action might be taken to protest particular enclosures.
Far from inclusive institutions assisting the majority, the dispossessed peasants could not block these changes because parliament was not inclusive enough.
Parliamentary supremacy was established only in 1688.
Representation was restricted to property owners. Nor did parliament play a role in ensuring that peasants were rapidly or fairly compensated.
The Poor Law did create a basic safety net though much depended upon the Parish authorities. Still, emigration was a safety valve.
They were not compensated at all. Parliament therefore played no direct role in the institutional transformation. The transition was successful because landlords could expropriate common lands without much peasant resistance, but they could not expropriate the peasant’s own land because peasants had sufficient collective power at the village level.
I don't understand this. Perhaps the reference is to 'cottars and bordars' but they could be summarily evicted. Indeed, agricultural labourers living in tied cottages could be made homeless very easily before the 1976 Act.
This fine balance of power ensured a capitalist transformation of agriculture that eventually led to an improvement in welfare across classes.
Emigration and rising wages in the cities, coal mines, etc. did help.
The configuration of organizational power and political institutions mattered, but in more complex ways than Acemoglu and Robinson suggest.
No. What mattered was productivity and 'exit'. If you can go to where you will be better paid, it makes sense to learn how to be more productive. If you can't exit, why bother? You are bound to be preyed upon.
Economic rent only arises where supply or demand is inelastic. It does not exist if there is perfect elasticity- which is what happens if there is free exit and open markets.
Rents can be defined in a number of ways, but they usually refer to incremental
incomes associated with specific institutions.
A guy who works for the Post Office may get a pay increment. It isn't a rent.
Some institutional changes, like
the creation of artificial monopolies, create rents that are socially damaging.
They may be. They may not. For a repugnant or demerit good, monopoly may be better if it leads to lower sales.
Where there are non-convexities, an artificial monopoly may be a very good thing.
But
welfare-enhancing interventions that create or reallocate property rights or
address market failures also create incremental incomes somewhere.
I think they can create 'imputed wealth'- e.g. getting a rent controlled apartment may be like getting a big inheritance. We say 'consumer surplus is capitalised'. If the landlord gives you a big sum of leave to quit his apartment, that's money in your bank account.
What types
of rents are created and how they are allocated and managed can serve as a useful lens for assessing the rent-creating institutions.
The law creates rents. Thus, one could say the Legislature, at the end of the day, creates and allocates rents. But we assess the legislature directly. Is it favouring the rich or the poor?
Dynamic societies have institutions that allow growth-enhancing transformations of rights and the creation
and management of rents that drive learning, innovation, and political stability.
Two societies with very different institutions may be equally dynamic or equally stagnant.
Less dynamic societies mismanage rents, allowing some groups to capture assets
and rents without delivering results, or they create rents that are directly unproductive, like monopoly rents or conflict-inducing redistributive rents.
This may lead to greater dynamism as innovative people flee the stagnant sector & join one which is unregulated and capable of rapid growth.
Since all institutional changes create new incomes, they inevitably create rents.
Not if there is free entry and exit and all goods and services are traded on open markets- i.e. everyone is a price taker. This doesn't mean there might not be economic rent where there is 'local monopoly'- e.g. a property situated closer to transport links.
Not surprisingly, the emergence of institutions is usually driven by
recognition of a collective action problem or else imitation of some other country which is taken as a model.
rent-seeking
and they create incentives for further rent-seeking.
There are plenty of institutions which aren't commercial in any way. Sadly their assets may be stolen by those who are supposed to safeguard them.
South Korea began its industrial take-off shortly after
Park Chung Hee took power in a military coup in 1961. By then South Korea had
already carried out substantial land reforms as the Japanese occupation had forcefully dispossessed the most powerful elements of the Korean yangban landed
elite and converted much of their land to Japanese ownership. With the departure
of the Japanese, land reform based on the redistribution of Japanese land and the
compulsory purchase of land from the remaining landlords was relatively easy to
achieve.
Urgent to achieve otherwise support for Communism would have increased.
These reforms led to a significant equalization of landholdings and a dramatic reduction in the number of tenants as they became smallholders. However,
it did not create a class of yeoman tenants on the English pattern who could drive
an agrarian capitalist revolution from below.
'Yeoman tenants' did not do so. They diversified their portfolios and sent their younger sons into various guilds or the learned professions.
The global conditions were not right
for smallholding agriculture to make much of an impact on South Korea’s economic
progress.
The peasant may have been happy enough, now that he owned a bit of land but the urban masses could be pulled toward Communism. If South Korea emulated Japan it would rise economically. The dictator was prepared to crush the Unions and 'Civil Society'.
At best, the land reform created political stability in the countryside in
the face of the communist threat from the North, expanded the domestic market
somewhat, and perhaps created a greater demand for education in the countryside (Kohli 1994; Putzel 2000).
The real impetus to South Korean modernization came with its industrial
push in the 1960s.
If it didn't industrialise, urban youth would despair of the economic model and look to North Korea.
A critical feature of the new institutional structure was the
provision of significant rents to the chaebol (the large family-owned conglomerates of South Korea), to enable them to engage in learning-by-doing to improve their organizational and technical capabilities (Amsden 1989; Khan 2000b). The
institutions supporting their learning also compelled the chaebol to rapidly acquire
international competitiveness by withdrawing support if they failed to perform.
The credibility of the withdrawal threat created compulsions for rapid productivity
growth and ensured that infants did not require permanent support.
The Dictator would arrest businessmen or senior chaebol leaders and force them to hand over their ill gotten gains. His successor bankrupted a big chaebol which hadn't contributed enough to his election fund.
Myrdal’s fear
that unproductive rent capture would compound the problems that any interventions tried to solve did not materialize in South Korea.
But the Dictator could do what he liked.
Why did South Korea not fall into this trap?
Because guys who angered the Dictator were sent to jail or forced to hand over all their money.
Pakistan provides a good comparison with South Korea because it attempted a similar mix of import substitution and export promotion, and provided rents to large holding companies using
similar instruments (Khan 1999). Indeed, in the early years, South Korean planners
came to Pakistan to learn about planning strategies. While there were many differences between the two countries, the decisive difference was that large Pakistani
companies were connected to powerful and dense networks within the bureaucracy, army, and political parties, and could use their help to successfully retain
rents even when their failure to become competitive had become obvious.
There wasn't one angry dictator who could fuck you up if you displeased him. Park was so feared, he was killed by his own intelligence chief.
The organization of patronage networks in Pakistan was fragmented, but each
network was powerful enough to resist disciplining by others or by state agencies.
In the late 1960s, the media openly reported how ‘twenty-two families’ had captured public resources, but the military regime was unable to impose discipline
on its inefficient clients.
Zulfiqar was but this fucked up the economy. Mujib was even worse in Bangladesh.
There was much corruption in this process, as Myrdal
recognized, but it was more than just a problem of corruption. The value-reducing
rent capture by powerful networks hurt the legitimacy of the ostensibly powerful
military government.
Losing wars did that.
It tried unsuccessfully to rein in its clients, including revealing
their names and the money they owed, but it failed. The regime was eventually
brought down in 1971 as a result of popular mobilizations against cronyistic elites.
Field Marshal Ayub Khan stepped down as President of Pakistan on 25 March 1969 primarily due to nationwide mass protests, severe economic unrest, and the loss of support from the military. His successor held elections which was won by the Bengali Mujib. This did not sit well with Bhutto or the Punjabi/Pathan military. The result was a war which the Pakistanis lost.
The failure was deeper than knowledge, values, or interests. The top leadership
had strong incentives to limit rent capture by uncompetitive business groups but
they failed to overcome their resistance.
The loss of East Pakistan hit the balance sheets of some of the 22 big business houses. However Bhutto's nationalization program was an utter disaster from every point of view.
The nature of the failure suggests that a
different policy design, perhaps supporting smaller, less-connected capitalists, or
rewarding investors after they had achieved some results rather than giving all the
rents upfront, may have worked better in this political settlement.
Why not just get the 22 families to cough up more in tax?
Indeed, we find
that other strategies of supporting learning worked much better in a number of
sectors in South Asia in the 1980s.
We know as a result of later revelations by the chaebol that the allocation of
industrial policy rents in South Korea in the 1960s involved much corruption.
But, here, corruption did not featherbed inefficiency. The chaebol receiving support
knew they had an opportunity to become competitive, but they also knew that the
option of capturing the rents while remaining uncompetitive was not feasible.
Pakistan tended to overvalue its currency and to support export industries with loans even when this was not economic.
This
was because the state agencies monitoring them were more powerful than the
networks that individual businesses could mobilize. The agencies figured out that
their formal and informal payoffs would be higher if they reallocated rents to chaebol that could grow and generate additional profits rather than inefficient
ones that could not.
Put more simply, if you back a winner, you get invited to better and better banquets. Back a loser and soon all you will get is a half pint of bitter and a packet of pork scratchings.
Corruption still happened, but here it was of a profit-sharing
type. The chaebol needed the support of the state, and they were willing to treat
the political leadership as informal business partners who could claim a share of
profits as ‘dividends’.
Whereas, State support was seen as an entitlement in South Asia. The Government school must admit my idiot of a son even if he will fail any and every exam and thus cause the School's pass-rate to fall.
The logic was simple, and both sides soon worked out that
profit-sharing corruption was not only not contrary to productivity growth,
given the distribution of power, it created incentives and compulsions to achieve
productivity growth.
One may say, East Asians were meriotcratic or focussed on winners. The South Asian mindset was about Entitlements.
The rent allocation rules could not be distorted because
critical agencies had the interest and the power to prevent it (Khan 1998, 2000b).
Where did this capacity come from? It is hard to argue that contemporary
South Korea had a culture with attitudes of rationality and discipline that were
significantly superior to South Asia.
It faced existential military and political threats. When war is imminent, only winning- not entitlements- matter.
True, it had a more developed industrial
history as a result of Japanese colonialism, but this cannot explain why inefficient
firms were not allowed to capture rents.
Because they would want the restoration of democracy. The Dictator wanted businessmen to focus only on business and the fear of arbtirary arrest and the forfeiture of their property.
The capacity to withdraw rents and
discipline the chaebol is more plausibly explained by a specific political settlement.
That of a Dictator.
The historical roots of this can be traced back at least to the impact of Japanese
colonialism. The latter was brutal, but it did not create a fragmented and competitive set of political organizations in its colonies, as the divide-and-rule strategies
of British colonialism created in South Asia and elsewhere.
Korea did have competing political parties. The Brits wanted a united India. The Muslim League wanted partition which they got because they won 90 percent of the Muslim vote.
The post-war South
Korean political settlement was marked by an absence of powerful competitive
networks within the state and bureaucracy,
there were elections unlike in Pakistan. Also a student uprising forced Syngman Rhee out of office.
so individual chaebol could not collude
and share rents with parts of the network to prevent themselves being disciplined
by other parts.
Park didn't trust the chaebols. Let them fear him and focus purely on growing their businesses. Park also wanted South Korea to rise in the value chain so as to give urban youth the sense that the country was catching up with, the old enemy, Japan.
When the South Korean state began its industrialization drive, its leaders did
not have pre-conceived ideas about how to make rent allocation achieve dynamic
results. Rather, trial and error revealed that making support to a chaebol conditional on the achievement of export targets resulted in rapid productivity growth
because the rule could be enforced.
How? By arresting business men and making them hand over their property.
The chaebol put in lots of effort to raise
productivity, knowing that the alternative would be disastrous for them. Once the
enforceability of these rules became known, the system evolved in a particular
direction, with more ambitious learning strategies emerging. In contexts where
state support could be combined with rules that compelled companies to achieve
productivity growth, similar types of corrupt but ‘efficient’ profit sharing emerged
in a number of Asian countries, including China in the 1980s.
Rules didn't matter. The wrath of the dictator did matter a great deal.
Trial and error revealed a very different political settlement to South Asian
state leaders. Leaders in Pakistan and India were soon aware that industrial policy
rents were being unproductively captured and though this was not in their interest they failed to discipline their clients.
They wanted import-substitution. In India there was 'export pessimism'. This continued into the Eighties when Sukhomoy Chakraborty said 'Korea is small. Taiwan is small. They could get on the 'elevator'. India is too big. You can't lift hundreds of millions out of poverty through export led growth.' The guy was a fucking cretin.
While individual bureaucrats and politicians benefitted, the higher-level leaderships lost out in terms of overall revenue
and legitimacy. Individual businesses constructed alliances with powerful
political and bureaucratic networks that undermined any possibility of disciplining them. The failure to govern rents was ultimately not due to flawed mental models but rather a configuration of power that made it impossible to impose
discipline on these firms.
In other words, India had a functioning judiciary. Still draconian laws of an economic type were introuduced in the Seventies. But this stifled enterprise.
In India, Myrdal argued that productivity growth was not even an explicit goal
of import protection, the latter was justified simply by the need to conserve
foreign exchange (Myrdal 1968: 1158).
You need foreign exchange to buy state of the art foreign White Elephants. Sadly, doing so means you have no fucking foreign exchange.
This is not true. Using protection as a rent
allocation instrument to develop domestic productive capabilities was a demand
of the nationalist movement, and it was supported by emerging Indian capital in
the Bombay Plan of 1944.
Ideally, as in Japan, 50 years previously, the Government would create a new industry and then sell it off so as to have the money to create another new industry.
Moreover, the failings of the industrial licensing system
were of great concern to the Indian state (Chakravarty 1987). However, when state
leaders discovered that efficiency could not be achieved, they would occasionally
justify their policies by saying this was not even their intention.
We know from the report of the Industrial Licensing Policy Inquiry Committee
(Dutt 1969) that Indian policymakers were painfully aware that businesses they
supported were not meeting their licence conditions and instead using their
licences to behave like monopolies. The Dutt Committee recommended sanctions
on business houses that failed to comply with licence conditions, but this was not
implemented.
The MRTP Act was passed. The problem was that cancelling licences just recreated the same problem.
As in Pakistan, the problem was clearly neither ignorance nor the
interests of state leaders. Rather, the peak agencies that wanted to achieve
productivity growth were weak relative to the powerful networks below them
who saw greater benefit in capturing rents without delivering results and using
the rents to sustain their power through patronage networks.
No. By then, most people were convinced that Nationalizing everthing was a panacea. Why let the private sector become more productive when this would give the State an incentive not to kill the golden goose?
The distribution of
power was the real source of this prisoner’s dilemma outcome,
Power shifted to the Left in 1969. There was no prisoner's dilemma. Capitalism was evil. In any case lots of companies were turning 'sick' & thus coming under Government control.
while the ability of
political leaderships in developmental states to discipline free riders allowed the
pie to increase for everybody.
India was a developmental state but it wanted Socialist development. The people too thought of Nationalised industries as being equivalent to Civil Service jobs. People wanted employment. They didn't want to do any fucking work.
Institutions and institutional outcomes reflected
the political settlement rather than values or norms.
No. Politics- Indira's lurch to the left (like Bhutto's or Mujib's)- fucked up South Asia.
We turn now to Myrdal’s analysis of the soft state. It is true that planning agencies in South Asia could not discipline businesses protected by political entrepreneurs from the intermediate and upper classes and their clientelist networks.
Sure they could. Nehru & Indira were large & very much in charge. Political entrepreneurs were no match for the Dynasty. The intermediate class did back regional/religious parties but they too saw no alternative to Socialism. Why? What everybody wanted was a Government job or, if that was not possible, one in a PSU. This was the Indian 'iron rice bowl'.
But
other state agencies were able to discipline subaltern classes
you co-opt the subaltern. Why crush your own potential foot soldiers?
or regional separatist
movements.
The Indian army kicked ass. The State had plenty of capacity for extrajudicial killing.
In these conflicts, states in India and Pakistan were ready to use
overwhelming force to ‘discipline’ segments of their societies. The enforcement
problem was therefore limited to specific sectors and institutions rather than
being a general malaise of social indiscipline.
There was an incentive problem. More enforcement just meant that the golden goose turned to shit.
The specific instruments that were
used, particularly for promoting industrial development, had governance and
disciplining requirements for specific organizations that could not be adequately
enforced.
Why? In business, economies of scale matter a great deal. Focus on that and your enforcement problem disappears. I don't say the State should pick winners but it should back winners if only because this grows tax receipts faster.
The implication is that other institutions and instruments allocating rents
to a different set of organizations may have achieved better development results.
How? The plain fact is the quality of entreprenuership was poor. Marshall had noticed this in 1910. There were notable exceptions but, the fact is, in the Fifties and Sixties, when some Marwari took over a British firm, he ran it into the ground pretty quickly. Was there some corrupt offshoring of wealth? Probably. Why didn't the Government reform the financial markets to put an end to this sort of mischief? The answer is simple. Socialists want Capitalism to collapse by itself.
This insight can help to explain the significant growth accelerations in a few
sectors in India and Bangladesh in the 1980s with relatively minor institutional
and policy innovations. The previous industrial policy had achieved output growth
in many sectors, but productivity growth was low because of poor disciplining. As
a result, competitiveness was typically not achieved in most sectors (Acharya
Mushtaq H. Khan 337
et al. 2003: table 2.2; Virmani 2004: table 1; Bosworth et al. 2007: table 3). The
growing economic openness from the 1980s helped imports of capital and
machinery, which supported productivity growth. But the achievement of competitiveness also required policies that assisted learning and capability development.
What is interesting is that relatively minor institutional and policy innovations
created the compulsions for productivity growth that were previously missing.
It created the incentive for capital deepening but of an imitative sort. Back in the 90s, I bought a BPL TV in London. It used to have 9000 employees. Now it has 151. As usual 'family feuds' featured in its decline. Currently, the Tatas & Mistrys seem to be entangled in such feuds. Let us see whether the RBI succeeds in getting big firms to publicly list their shares. If this does not happen, industrial policy will always be on a shaky basis.
The new policy and institutional innovations in a few sectors were successful
because rents were delivered to organizations that did not have the power to
protect them unconditionally.
No enterprise had any such power. Sadly, family feuds could and can bring down almost every Indian company.
Conditions could be credibly enforced that would
hurt the firms if they failed to deliver results.
Like what? Loss of a licence? But who gets the revoked licence. You can't wave a wand and magically create competition.
An important feature in several of
these take-offs was that investors were induced to first invest their own resources
in learning, with policy promising sufficient ex post rents to give a high return on
their risky investments if they succeeded.
That is profit, not rent. Only if you say 'grow big enough and we will give you protection' would this be the case. But if you will get protection, you won't go all out for economies of scope and scale. You just have to have higher capacity than your closest rival.
I have discussed these examples at greater length elsewhere; they included
automobiles and pharmaceuticals in India and garments and textiles in Bangladesh,
sectors that drove growth accelerations in these countries from the 1980s onwards
(Khan 2011, 2013a, 2013c). The cases are different, but we can summarize the
Bangladeshi garments and Indian automobiles cases to illustrate their common
features.
Bangladesh got lower tarrifs for textiles and thus foreign firms as well as domestic entrepreneurs (or Indian entrepreneurs) set up factories there. India has a big internal market for cars and so foreign firms set up partnerships with Indian entrepreneurs.
In these two cases ex post rewards were created for a foreign partner to
transfer capabilities to domestic firms.
Did you know your salary is an ex post reward? What's so strange about firms investing in a place where they expect to make a healthy profit?
In a third sector, Indian pharmaceuticals,
the story was slightly different. Here ex post rents
profits
were created for domestic
firms if they succeeded in developing manufacturing capabilities by backward
engineering based on the application of the Indian Patent Act of 1970. But all
these sectors were similar in rewarding successful capability development ex post
salaries are paid in arrears. Profits are like salaries. You get it after the work has been done and the product has been sold.
as a way of encouraging prior private investments and being successful in the
implementation of these rules.
In the Bangladesh garments sector, the critical instrument was an agreement in
1979 between a Bangladeshi company, Desh, and a South Korean company,
Daewoo, backed by the Bangladeshi state.
The Bangladeshi dictator personally assured the South Koreans that the government would expedite matters.
The context was the Multi-Fibre
Arrangement of 1974, which created potential ex post rents for least-developed
countries like Bangladesh if they could achieve sufficient quality and competitiveness to sell garments in the quota-protected US market.
The South Koreans had hit their quota limit.
The protection created
quota rents in the US market, and the agreement was to pass on the potential
quota rents to Daewoo as its reward for transferring export capability to Desh
(Khan 2013b). The rule essentially transferred a percentage of future sales revenue
to Daewoo, and this was sufficiently rewarding for it to invest in capability transfer.
What made the rule easy to enforce was that unless Desh acquired the capability
to export, no one would make any money. No ex ante rents were allocated to
powerful businesses in Bangladesh, so there was no possibility of capturing these
rents. The rule for transferring quota rents to Daewoo was also credible because
the Bangladeshi state could prevent a relatively small firm from violating a contract
that the President saw as vital for the country.
The problem was that if the President was killed (he was) and some crazy Socialist came to power, then the plant would be seized. The Koreans took the risk because Zia was well regarded by the Islamic block where the Koreans were earning well.
This combination of credible ex post rents for Daewoo and compulsions for
investors to recover their investments resulted in dramatic capability development.
Desh became a competitive firm within months of sending an army of supervisors to South Korea to learn factory and supply chain organization. As the
organizational design that it adapted was appropriate to Bangladeshi conditions
and could be easily imitated, thousands of Bangladeshi entrepreneurs entered the
garments industry. The explosive growth of the sector created millions of jobs and
within two decades Bangladesh had become the second biggest garment producer
after China, though still far below China in absolute terms.
Bangladesh doesn't have much market power. So this isn't a story about economic rent. It is a story about minimizing costs & improving quality so as to get a return on your investment.
In the Indian automobile industry, the government signed a joint venture agreement in 1982 between Suzuki, a Japanese company, and Maruti, a public sector Indian company, allowing Suzuki to sell in the highly protected Indian market if it could produce an Indian car with sixty per cent domestic content within five years. Given that Indian tier one and two producers already had basic technical capabilities, the incentive of capturing significant tariff rents ex post was sufficient for Suzuki to invest in developing the capabilities of its Indian suppliers.
No. The incentive was to increase its equity share till Maruti got publicly listed (by which time Suzuki was the majority shareholder. It is true that there was 'tariff rent' in the sense that Maruti was about 50 percent more expensive than the global equivalent but it was 40 percent cheaper than the shitty 1950s style Indian cars.
I may mention Suzuki was taking a bet on the Gandhi family. Maruti had been Sanjay's company. Indira could be trusted to favour it for this reason.
Here, too, the mechanisms of rent allocation were credible to the parties, as was the enforceability of the conditions.
It was a risk. What if Indira was killed and the Commies came to power?
Rents could not be captured by Indian components producers because no ex ante rents were transferred to them.
Component producers have little market power. Barriers to entry are low. They don't get rents in the ordinary course of things.
A failure to achieve international standards with Suzuki’s help would simply be a lost opportunity for future profits. Suzuki knew that the strong opposition to its operations from domestic automobile and machine tools producers meant that a failure to achieve the domestic content conditions would result in exclusion from the Indian market.
You can always fudge the numbers.
There was no question of the capacity of the Indian state to enforce this condition. As Suzuki was investing first, it had strong compulsions to succeed as that was the only way to capture the ex post tariff rents.
You have to sell cars to get paid for making them. The risk was that Indira would fall and her successor would fuck over Suzuki.
East Asia has experienced wars or revolutions. South Asia hasn't. But South Asian countries could have doubled down on devaluation and export-led growth like South Korea.
South Asia inherited a very different political settlement.
because the British inherited a very different political settlement as did the Mughals & the Aryans & the Dravidians before them.
Both democratic and authoritarian governments in India, Pakistan, and Bangladesh discovered their enforcement capabilities were limited when they faced powerful political and bureaucratic factions organized by the ‘intermediate classes’.
Sugar lobbies etc. are important in countries with a very big agricultural sector. Armies recruit from the villages so even a military dictator has to be careful. But the 'intermediate classes' (small businessmen with a relative in Government service and another in some political party or caste association) aren't involved in high tech manufacturing. You may say 'power-loom sector' must be appeased but they are scarcely capturing much in rent.
Myrdal described a moment in the history of these countries when they were using policy instruments that were seriously distorted in their implementation.
India was doint stupid Socialist shit. If Ayub had won the 1965 war, he'd have been unassailable. But he lost. The Army decided not to back him. Then they held elections.
Subsequent developments in the 1980s and beyond show that substantial growth could be achieved
by letting people make money & letting enterprises which lose money shut down.
with policies and institutions allocating rents in other ways,
you can't allocate what doesn't exist.
even though these have not been developed to their full extent. Nevertheless, the long-run pace of development in South Asia is likely to be slower and more uneven than in North East Asia.
It may be faster because of 'low hanging fruit' & the possibility of new technology permitting 'leap-frogging' i.e. better, cheaper, infrastructure- e.g. mobile phones instead of landlines.
South Asian states do not have the political and institutional capacity to support development across a broad range of sectors and regions all at once, as these strategies typically require disciplining a broad range of policy rents.
In poor countries, theft is a problem. Fraud is a problem. Absenteeism is a problem. Religous riots are a problem. Rent seeking is a problem only in advanced countries where some enterprises have a lot of market power & are willing to use PACs & lobbyists to protect 'super-normal' profits.
Khan ends his paper thus
The growth and empowerment of powerful productive organizations that will
eventually demand the enforcement of rules in their own interest
they can do this through an industry association of their own. Rule breakers lose accreditation & this affects their credit & share price.
is the only sure
way of eventually creating an effective demand for a transition to a rule-following
society.
At the margin, carrots & sticks matter. But, overall, mimetic targets matter more. Public signals in this matter can improve the Aumann correlated equilibria.
As against this, regressive interests and organizations in these societies
can also be expected to mount their own rent-seeking and influencing activities.
Stupid Socialists we will always have with us.
We can expect them to try and distort institutions in ways that can be described
as social indiscipline, corruption, regressive social norms, and impunity. The pace
of, and prospects for, development are likely to depend on the contest between
these contending forces
Or not. A society can become disenchanted with politics and focus just on commerce for a generation. The rule in commerce is, if you want to rise long term, be honest. Gain goodwill. It is a balance sheet asset. For India, this means family run firms should heed the RBI and get publicly listed. Don't let 'family feuds' fuck up the legacy of your ancestors.
