Book Review: How China Escaped The Poverty Trap

The first part of the post had the summary of the book. This part has my comments on the book.

Lessons for India

1.  There’s no escape from decentralizationThis is a seemingly obvious point but all the actions of India’s politicians violate this cardinal principle. There’s an illusion that one can fix things with centralized structures. The sooner we realize the importance of decentralization and empowering the local governments, the better. Even in China, which is a one-party dictatorship, there is in fact a mixture of political centralization and economic decentralization.

China did this through incentivizing local bureaucratic heads, making them accountable for economic performance. India needn’t necessarily follow these precise policies but the general principle can be adopted. For instance, Indian mayors should be made more powerful, and be made responsible for city’s economic growth.

2. Don’t let identity aspects supersede other goals: One of the important lessons from the China’s experience is its laser focus on enhancing economic prosperity. As the book acknowledges, China could set this goal because of its political structure. In other societies, the process of setting up this goal is in the realm of politics, with competing goals.

In most developing countries, politics is not just an instrument to enhance economic prosperity; it is also a platform to negotiate, and also a mechanism to provide empowerment through participation. For instance, the prime issue of some elections need not be economic; it can just be a mere tussle for greater representation of certain communities and so on.

While the questions of identity are important and it’s good politics in long-term to negotiate these differences, one should not exploit these fissures deliberately for political purposes. It’s because once the identity issues become the prime issues, all other critical issues take a back seat. Most of the times, politicians activate these fissures for political purposes. It’s time to realize this and stop it.

 My comments

1. On harnessing weak institutions: I am deliberately playing a devil’s advocate to question the ‘harness weak institutions’ proposal. The counter question is ‘why not attempt to build strong institutions?’ to begin with.

To this, one may respond that institutions and markets have co-evolved in the past and hence they should be so in future. It may be true that markets and institutions co-evolved in the past but it raises two questions.

One, was the coevolution of market-institutions in the past out of necessity or with a complete knowledge of ideal institutions as a goal and with a prior strategy to reach that goal in incremental steps? If the evolution was out of necessity and was not part of a larger strategy with full realization of final goal, then this isn’t exactly the same case as present, when we have full knowledge of the future goal posts. Why should we re-invent the wheel then?

Why should the historical pattern that emerged out of necessity, be followed in the future too? What’s wrong with leapfrogging and creating strong institutions now, instead of waiting for institutions to mature? Will it lead to any repercussions?

Further, the situation in countries in India is not as bad as 1970s China where public bureaucrats are paid below minimum wage. Public employees in India are decently paid compared to the per-capita income. The low pay necessitating creation of other avenues for their income therefore is not a constraint.

One can now argue that proposals to build strong institutions may seem sensible but they don’t exactly layout how to do it?  It’s true that the prescription to build institutions doesn’t tell us what exactly to do but so is the case with the prescription to ‘harness weak institutions’. Ultimately, one has to figure these things out; no one can list them for all cases.

A further problem with the approach of ‘harnessing weak institutions’ is that it isn’t clear if it leads to positive outcomes in all cases. It can lead to creating huge entry barriers for many, keeping many prospective investors out of reach, as is the case with India currently. Such effects may have been less pronounced in case of China, because it was compensated by the strong incentives of bureaucrats to invite investors, which is not the case in all contexts.

Harnessing weak institutions can in fact turnout to be defense of the corrupt in the government, legitimizing their corruption.

Also, harnessing weak institutions inherently involves some amount of deviance from the ideal scenario. It may have worked in the past at times when the consensus on modern day governance principles of transparency, accountability etc., were less rigid and media is not as powerful as today. Today, such consensus is rigid. Any deviation from such consensus, even in good sense, is bound to attract media attention and the wrath of investigation agencies. The recent debate in India on punishing a bureaucrat for awarding coal mine licenses without following procedures is a case in point. The book also talks of similar instances in China. So, the question is – how can we do this in today’s world?

Finally, the prolonged weak institutions in India has resulted in a state of equilibrium where people have found a way around it to start businesses compelled by pressures to sustain themselves. If anything, countries like India might now be suffering from inefficiencies resulting from too much of harnessing weak institutions. The need of the hour is thus to transition to modern institutions and not more of harnessing weak institutions.

2. Petty corruption vs. Growth: The book posits that growth cures petty corruption. The evidence from India necessarily doesn’t support this. One still faces numerous struggles in government offices to get job done, without paying a bribe. There isn’t a perceptible decrease in levels of petty corruption, except in cases where certain services are automated.

3. Meta-Meta institutions: The book talks about meta-institutions that enable adaptability. I argue that we can go even a step back in the causal chain to meta-meta institutions. The meta-meta institutions tell us – what made the governments to enable conditions for adaptability?

This is an important question because there’s certainly something in China that enabled adaptability enabling factors like decentralization. Even if Indian leaders speak volumes about their commitment to growth and decentralization, they haven’t done much on the decentralization front, thereby prohibiting an important factor in enabling adaptability.

May be the meta-meta institutions has to do with the quality of leaders who are truly focused on prosperity and are ready to give away certain privileges for that purpose. This highlights the role of leadership in shaping the economies.

The fundamental causal factor for economic success then becomes leadership with appropriate vision and ability to create adaptability-enabling conditions to build strong institutions.

4. What about other inputs for growth?: The book talks mostly about the efforts of bureaucrats to invite investors and the resultant success. But this couldn’t have been possible without the presence of other complementary factors like skilled labour, education, health care etc., about which there is little description in the book. It would have been good if there was some description of efforts on these fronts, especially because many developing countries are finding it difficult to get these things right.

5. Other forms of institution building: Institution mostly deals with those related to market. Those are only one type of institutions. There are other types of crucial institutions like education, health care etc., which are the wicked-hard problems as Lant Pritchett calls it because of their implementation intensive nature. How did China build these institutions?

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