The write up produced here is the lecture delivered by Prof. Amar Yumnam on Arambam Somorendra Memorial Lecture held on 10th June, 2018 at Lamyanba Shanglen Palace Compound
As North said, economic institutions determine not only current economic outcomes but the future distributional pattern as well. Because of the distributional implications, there naturally arises a “conflict of interest” among individuals and groups over the endogenous determination of the institutions. Whose choice of institutions prevails depends upon the political power of the group. This endogenously emerged political power may be either de jure or de facto , the latter depending upon the level of cohesiveness (level of solution of collection choice problem) and the command over economic resources of the group. Though technology and other shocks may bring about substantial changes, there is generally path dependency and persistency in the system because of the difficulty of effecting major changes in political institutions and the inherent behaviour of groups to protect their economic interest. “[G]ood economic institutions that provide security of property rights and relatively equal access to economic resources to a broad cross-section of society” would emerge if the political institutions have (a) built-in checks on the abuse of power; (b) the political power is widely based “with significant investment opportunities”; and (c) the scope for political rent seeking is limited.23 But a Coasian efficient outcome (Political Coase Theorem) does not necessarily result because the “ efficient set of political institutions is indeterminate” arising out of the commitment problem of the groups. A bold and an all-encompassing attempt at institutional analysis of development is that of Avner Greif. He attempts to bring all the elements of the different institutional approaches under one common framework, trying to explain path dependence as well as dynamics of change. According to him, institutions “are not monolithic entities” but “ a system of social factors that conjointly generate a regularity of behaviour ” . Each component of this system is social in being man- made, nonphysical factor that is exogenous to each individual whose behaviour it influences. Together these components motivate, enable, and guide individuals to follow one behaviour among the many that are technologically feasible in social situations. “I often refer to such social factors as institutional elements. The institutional elements.... are rules, beliefs, and norms as well as their manifestation as organisations.” Thus [o]rganisations are institutional elements with respect to the behaviour we seek to understand, but they are institutions with respect to their members’ behaviour .” This approach of Greif has the potential of converting the parallel journeys of rules of law approaches of Northian variety and the governance approaches of Williamson variety to institutional analysis into a unified journey . In fact, this is both needed and significant. First, appreciation of the “economics of governance [which] is principally an exercise in bilateral private ordering, by ... the immediate parties to an exchange ... actively involved in the provision of good order and workable arrangements” is fundamental to understanding the dynamics and sustenance of an institution. Secondly , the emphasis on transaction costs in the governance approach is important to appreciate the efficiency of an institution and its concomitant implication for development. Thirdly , as Williamson himself emphasises repeatedly in his writings, the concept of the firm need not be equated with the real world, the one we come across. Once this is done, we can extend the analysis, as we should, to other social institutions. Fourthly , the adaptation aspect of the governance approach combined with the Northian emphasis on institutions as a mechanism to address uncertainty would be a powerful tool for development analysis. In fact in the latest paper of North and group, we see incorporation of the Greifian approach (2006) and the analysis of Acemoglu (2006) as well as a major advancement of North’ s own trademark analysis. The path dependence is now seen as (a) the crafting and functioning of “organisations ...for sustainable human cooperation”, and (b) the transition from one social order to another . The state is the highest form of organisation evolved with the primary function of “providing order” as “human violence must be prevented or contained”. The state is different from individuals as the former is “inherently an organisation: it is group of individuals pursuing a mix of common and individual goals through partially coordinated action”.34 Further , the “internal structure of relationships among members of the state - the state’ s industrial or ganisation if you will – is what constrains violence”. As regards social order starting from the pre-historic to the present developed countries, human beings have passed through three types of it – Primitive Social Or der , Limited Access Social Orders and Open Access Social Orders. The first social order is of the hunter-gatherer period of the prehistoric times. The formation of an organisation to reduce violence in this period leads to the emergence of the second order . The result is the natural state, which reduced “violence, producing enormous social gains. Every member of the society is better off. But...does not eliminate violence”. The reduction of violence increases the rents of the individuals while at the same time providing scope for Smithian economies. Sustenance of these economies from specialisation, however , calls for liberalisation of entry , which in its turn has the potential for compromising on the rents of the original member-elites (possessing “privileged rights to valuable resources, such as land, or valuable social interactions, such as trade or worship”) of the system. Hence, there was a limitation to the entry into this system. This limitation, however , gets crossed when the expansion of the scope for interpersonal exchange provides opportunities to the elite’ s scope for a more intensified as well as diversified exchange, and also to “extend the range of organisations supported by the state to include non-elite individuals”. Here more competitive political and economic forces come into play taking the state to an open access society . The progression of these “stable, but not static”39 social orders “is not linear , and regressions can occur”. In the entire process of transition from limited access social order based on rent to the open access based on competition and within each stage of the social order the “political and economic systems are organically related, as they are both parts of the same social order .... [S]ustaining fundamental changes in either the economic or political system cannot occur without fundamental changes in the other .” The corollary this has with modern liberal philosophy can hardly be missed. The emphasis on the significance of political institutions has now naturally led to the question of the nature and role of the state in development. Here we may recall Hirshleifer ’s postulation of two possible paths or technologies for meeting demands, one through own production and the other through expropriation from others.43 In a way which we can say as incorporation of such an approach to the institutional analysis, we now find unbundling of institutions into property rights institutions and contracting institutions.44 Because of the possibility of individuals learning and adjusting to contractual relations while such scope is very limited in the case of state-individual property rights relationships, the implication of the latter for development is much more than that of the former . The risk of an expropriatory state is rather huge. This is also the conclusion we are getting from the ongoing debate on paternalism; in a context of endogenous cognitive errors, cost of paternalism can be really high. Though “inter-group inequality should have an effect on the equilibrium of political institutions and thus on the likelihood that a society ends up as a democracy”, one may come across in the real world four different types of political development and ultimately state: A. There can be a dynamic from non- democracy to democracy and the latter getting sustained and stabilised; B. There can be alternating cycles of democracy and nondemocracy; C. An equitable and healthy economy making democracy not necessarily attractive and therefore continuation with non-democracy; and D. A highly unequal and exploitative society where any movement for democracy is heavily suppressed. Simultaneously , there are now extensions being made to the original Smithian argument on the extent of specialisation being limited by the size of the market. This literature proposes a stage analysis of evolution of the market economy based on the increasing prominence of early subjective relation based relationships to modern generic relation base d relationships. An economy passes through five stages starting from the non- equilibrium subsistence economy , traditional social economy equilibrium, inter-personal trust- based specialisation, impersonal objective based specialisation, and finally , the modern market economy . Now there is also what is known as social capital. Though we may like to club them with the institutional approach in the sense that it represents the quality of the institutions, there is an active and increasingly vocal group of economists who are unhappy with the institutional analysis giving scant attention to culture. While institutionalists talk of both formal and informal aspects, this group dwells principally on the informal rules. This group emphasises the significance of social capital in explaining the development path of a society . While studying this group, we find two sociologists, Coleman and Putnam51 strongly impacting upon the writings of the economists. Coleman expresses unhappiness with the “individualist bias in neoclassical economics” and the “broadly perpetrated fiction in modern society , which is compatible with the development of the political philosophy of natural rights, with classical and neoclassical economic theory , and with many of the intellectual developments (and the social changes which changes which generated them) that have occurred since the seventeenth century . This fiction is that society consists of a set of independent individuals, each of whom acts to achieve goals that are independently arrived at, and that the functioning of the social system consists of the combination of these actions of independent individuals”. As contrast to the functionalist approach of the institutional economist, he emphasises the structuralist approach where “[s]ocial interdependence and systemic functioning arise from the fact that actors have interest in events that are fully or partially under the control of other actors”, and the structure of relationships has “some persistence over time”. Trust and networks are important ingredients in this structure. Though, unlike physical capital, social capital does not possess fungibility , yet it “is fungible with respect to specific activities”. It “inheres in the structure of relations between persons and among persons”, and neither “in individuals nor in physical implements of production”. Thus, Coleman speaks for contextual understanding of social capital, which consists of “some aspect of social structure, and ....facilitate[s] certain actions of individuals who are within the structure”. Being contextual, a given social capital can have either positive or negative impact according to the context, and accrue to the structure as a whole. This impact is thus economy or social-wide rather than individual oriented. Most of social capital is of the nature of public goo d as “it is in a fundamentally different position with respect to purposive action than are most other forms of capital”. Analysing the differential development history of the regions of Italy , Putnam attributes the better performance of the northern region to the “features of social organisation, such as trust, norms and networks that can improve the efficiency of society by facilitating coordinated actions”. Horizontal networks, where actors have equal power and status, help better in building high social capital stocks as compared to the hierarchic vertical networks.
Economists have, however, not been happy with the broadness of the concept and the use of the term capital in social capital. For Stiglitz, it “is a concept with a short and already confused history”, while we also have the widely quoted appeal of Arrow for “abandonment of the metaphor of capital and the term, “social capital”. The term capital implies three aspects: (a) extension in time; (b) deliberate sacrifice in the present for future benefit; and (c) alienability”, and social capital does not satisfy condition (b) at all. Solow, too, expresses doubt that “social capital” is the right concept to use in discussing whatever it is we are discussing…”, and asserts that in trying to explain development we should be looking “for that is at least capable of being found”.
However, given the expansion in the social capital literature, one may safely say that this initial scepticism has been taken care of or rather been ignored. Here the very first footnote of a recent paper by Durlauf and Fafchamps is worth quoting: “Even if a precise definition of social capital were attempted, it is likely to be no less vague than other similar concepts. The term capital, for instance, is used to sciences can be given to Fukuyama who had concentrated on trust as “the expectation that arises within a community of regular, honest, and cooperative behaviour, based on commonly shared norms, on the part of other members of that community” in his broad study of social capital. But in economics, it is Dasgupta who has set the trend defining the areas of focus and boundaries.63 He talks of trust “in order to describe different things – from finance to machinery to infrastructure. Human capital similarly has many different meanings, such as education, nutrition, health, vocational skills, and knowledge. This kind of vagueness, however, is less problematic as long as researchers agree on some basic principles”. This view is quite reflective of the argument put forth by Dasgupta who had argued that “in regard to both heterogeneity and intangibility, social capital would seem to resemble knowledge and skills. So, one can also argue that since economists haven’t shied away from regarding knowledge and skills as forms of capital, we shouldn’t shy away in this case either”.65 Indeed, one of the most referred articles on social capital by economists predates the attack. The last little over half a decade has seen a sharp rise in social capital research as it relates to development. The ambiguity and vagueness of the concept are being increasingly addressed in recent studies. The earlier approach of looking at social capital purely as an individual-based phenomenon context of someone forming expectations about those actions of others which have a bearing on her choice of action, when that action must be chosen before she can observe the actions of those others. Trust is of importance because its presence or absence can have a bearing on what we choose to do, and in many cases what we can do”. This involves what economists call “network externalities” (she trusts you, now you trust me, so now she trusts me, and so forth)”. It is the repeated personal interaction which is significant, while the importance of the state arises in the case of actions where “public verifiability” is necessary. As Collier says: “The model of social capital … has three building blocks: social interaction, the effects of social interaction, and the mechanisms by which social interaction works”.
This is where the difference between what Francois calls ‘culturalist’ (sociologist) explanation of trust on the basis of individual types differs from the economist explanation based on incentives for pecuniary benefits. While sociologists look at the problem from the top down of the cultural surroundings, the economists study it as individuals acting rationally. While there is some truth in what Guinnane calls presence of “warm noises” in research on trust and necessity of focusing on information and enforcement71 as emphasised by Williamson, one must appreciate the increasing effort in this literature for greater clarity and identification. Following Durlauf and Fafchamps and Hooghe and Stolle, trust is now divided into two types – personalised or particularised trust and generalised trust. The personalised trust is something which is built up over a period of time through repeated interactions, and implies trusting people whom we know or know something about them. The generalised trust, on the other hand, is instantaneous, and so more beneficial than personalised trust because of the lower transaction costs. It is fostered by rule of law institutions and participation in the market. It is participation in the market which transforms personalised trust into generalised trust, while the rule of law institutions deters one from opportunism. The concept of trust is now expanded to cover the relational aspect and not just the payoffs in material terms. As Pelligra analyses, “[T]rust responsiveness…cannot be entirely internally generated, it arises in fact from the relationship with the other…that…represents the mirror of our self”. It is conceivable that “some of the reasons for being trustworthy arise from the mere fact of being the object of someone else’s trust”. Trust, whether relational or being driven in the conventional neoclassical way by purely pecuniary benefits, necessarily involves
interactions between two or more individuals. Ipso facto, we have to think of a system of networks while analysing trust. An investment in a network channel is irreversible, and any network is exclusive. This provides for repeated interaction within the network, which reduces the cost of maintaining channels and interaction – the network externalities. Now what do we mean by Geography? Whereas the institutional
approach to development has its roots mainly in historical analyses, the main foundations of the emphasis on geographical factors in explaining development, now generally known by the label New Economic Geography (NEG), are to be found in theoretical innovations. The approach has made good strides in the last sixteen years but never make it to the core of economic analysis because of certain fundamental problems in theorising.
First, there was always the problem of movement from explaining the location of firms to the location of industries. Secondly, there is the breakdown of competitive price mechanism in the presence of transport costs. Thirdly, there was not possibility of application of general equilibrium analysis. Fourthly, there was the necessity of incorporating increasing returns and externalities into the analysis so as not to bog down at the level of what is called in the literature “backyard capitalism”. But appropriate accounting of these issues is called for to explain the phenomenon of transition from first nature to second nature by human beings. The climate and topographical features as handed down to human beings by nature are first nature and are exogenous. But human beings have always tried to surpass the limitations of these by endogenising the first nature through creation of a second nature. It is this which leads to the emergence of agglomeration economies and growth. “To put it another way, an economic model of agglomeration is expected to provide a general equilibrium story about the centripetal forces that pull economic activities together and the centripetal forces that push them apart, relying on the trade-off between various forms of increasing returns and different forms of mobility costs”. Here it may in place to mention that a new variant of economic geography in the form of Evolutionary Economic Geography is now merging with gusto. There is a strong influence of Schumpeter
in this approach, and the economy is seen an “evolutionary process that unfolds in space and time”. We shall, however, be confining ourselves to NEG, which today seem to be juxtaposed against the institutional approach in empirical debates. Two factors have been instrumental in shaping the NEG. First, is the well-known Dixit-Stiglitz formalisation of monopolistic competition. Second were the already existing theories of location. Krugman is the first to exploit this situation with his core-periphery model83 which have now been followed by two more important landmarks. With these new developments, the NEG has fully incorporated the insights of the new trade theory into its fold, and has now become a close cousin of urban economics. Unlike the institutional approach, the NEG is marked by more or less unity of approaches. This is despite the presumably two contrasting approaches of geography as destiny of Sachs86 and development as accidental phenomenon of Krugman. As Krugman himself argues, “Understanding why small random events can produce large consequences for economic geography is also crucial to understanding why underlying differences in natural geography can have such large effects”.
The core-periphery model introduced by Krugman88 is taken as the work-horse of NEG. While there have been many extensions to this original model by incorporating innovations sector, different preference functions, and genetic issues, to name a few, the analytical appeal of the original model is not lost. The economy is characterised by spatial pecuniary externalities. It has two regions, two sectors (agriculture and anufacturing), and two types of labour (farmers for the agriculture sector and workers for the manufacturing sector). The respective labour is the only input for each sector. Farmers are immobile, and so equally distributed between the two regions of the economy. The workers, on the other hand, are freely mobile between the two regions. The agriculture sector is characterised by constant returns to scale and produces a homogeneous good. The firms in the manufacturing sector produce horizontally differentiated products under increasing returns to scale. Since the agriculture sector produces a homogeneous product, it is not traded, whereas the products of the manufacturing sector, being differentiated, are traded. The trading of the manufacturing sector products involves transport costs. The economy now experiences two opposing forces, one for agglomeration (centripetal) and another for dispersion (centrifugal). The centrifugal forces result from first nature, immobile factors, and pure external diseconomies. The centripetal forces are the Myrdallian circular causation effects resulting from the forward and the backward linkages of location. The forward linkage results from the external economies emanating from a concentrated location. Besides, there is the backward linkage in the form of home market effects. Under the latter, the varied products and higher wages97 attract even more demand for the manufacturing products and immigration from the other region. Now all these effects are hysteretic. If the centripetal forces are stronger than the centrifugal ones, we have a core-periphery pattern wherein all the manufacturing activities would take place in a single region. This would be a particular result if the economy
is characterised by low transport costs, highly varied products and lumpy manufacturing expenditure.
However, the agglomeration is not a necessary result. A small chance factor or a small inherent initial advantage only brings about this result. When these conditions are violated, catastrophic bifurcation results.
NOW WHAT IN MANIPUR? The problem arises here. For Manipur to experience the development process and reap the benefits of it, it is inevitable that the development interventions should be evolved endogenously and fully alive to the institutional norms and the geographic heterogeneity of Manipur. This is particularly important as the Institutional and Geographic Diversity are salient both within and without. These are exactly what have not happened. The cultural ethos and institutional features are heterogeneous in Manipur in addition to the divergences from what prevail in other parts of India. However, all the development interventions have been evolved to converge to the institutional requirements in the other parts of India. This has resulted in one significant avoidable characteristic of the development interventions. Since the relevance of the interventions is non-contextualised, the transaction cost of each intervention has been necessarily high.
The case of Manipur, in so far as developmental interventions are concerned, has been anything other than endogenous. On the other hand, the interventions have been rather to exploit the contextual diversity for exogenous benefits and resulting in unprecedented conflicts. The introduction of democracy in Manipur has no contextual grounding and we are yet to fully apply our mind to the crises generated by this. But it is because of these crises that the Indian State and its manifestations in Manipur need to be extraordinarily careful in attending to the requirements of developmental administration in the State. At the cost of being hasty, let me point out emphatically that what Manipur needs is the best form of a developmental state or at least a state which continuously endeavours to project its developmental face. Unfortunately, this is exactly what has been lacking in the state. Given the fact of exogenous origin of the paradigm of government, the Indian State should have tried, and there is no alternative to this, to make development and developmental governance the guiding principle of every intervention in Manipur. This alone could have addressed the crises caused and to be caused by the abrupt transition from the old regime to the new paradigm. The same is true in the case of the geographic contextualisation of the development interventions. The economic, cultural and ethnic diversifications of geography necessarily demand geographic contextualisation in a much more complex way than elsewhere. This again has not happened. The non-appreciation of the geographic characteristics – climate, terrain, disease conditions, differential social sector needs, etc. – has also been accompanied by non-recognition of the historically accumulated geo-political properties. This is how an age-old kingdom has been reduced to a just political boundary rather than a border with autonomous history. The history of the geography and the geography of the history of Manipur have been side-lined from the deliberations and articulations of governance interventions. Since the development interventions have not been contextualised and there is primacy of the Centre in the prevailing Centre-Periphery relations being coupled by the
unwillingness of the former to develop contextual ideas of the region, there have developed certain unhealthy processes and outcomes.
First, the locus of knowledge of the region is not the region, but somewhere else in India. Second, the cost of knowledge acquisition has unavoidably been made costlier than required.
Third, the imperative for appreciating the dynamics of TransBorder areas has been fully subverted by the militaristic approach to protection of boundary. Fourth. In these circumstances and given the low level of development, the relationship – within Manipur and without - has been made to base on interests rather than ideas. Any interestbased relationship cannot be generalised at the societal level. If the powers that be at the provincial level desire to achieve something, it necessarily has to be founded on a collusion with the powers that be at the Centre. Since the intra-provincial relationship cannot be independent of the Centre-Province relationship, the same collusion-based dynamics gets replicated here as well. Overall, the milieu has become one where Ecological Rationality, evolved more by conveniences, predominates over the conscious and conscientious application of Constructive Rationality over choices. Any governance intervention has invariably been made to converge with the interests – not ideas – of the powers that be either at the Centre or province. The same pit-falls dwell the Look East/Act East Policy as well. Manipur and for that matter the Northeast is still an ideationally missing element in India’s development policy-making. Governance – in both the Central and the provincial dimensions – is something like undertaking a long journey without destination. Any governance in any societal context should necessarily exercise the exclusive power of the state and possess the capability to effect relevant reforms in order to take the economy forward. This is the only means to ensure the emergence of an institutional framework capable of ensuring, in turn, a higher level of well-being for the population. Such an institutional framework should also possess a justice enhancing feature so that the resultant distribution pattern does not harm the interests of the poorer sections of the population. Besides, such a framework should be able to establish an increasingly efficient mechanism so that the society and economy is able to perform two things: one, an existing function in a less costly way both in terms of money and time, and two, a new task earlier unthought-of but having positive welfare implications for the population. In a context like Manipur’s, the framework should be such as to generate multi-community understanding and scope for mutual advancement across geographic spaces. This is why we need to repeatedly go back to the issue of governance and search for why and where we have gone wrong. All the prevailing realities have however resulted in a low-trust relationship between the government and the governed in Manipur. The populace feel that both the governments at the Centre and the province do not cultivate fair practices while dealing with the population. Let me end with a quote from “Why Nations Fail” by Acemoglu and Robinson.
Political and economic institutions, which are ultimately the choice of society, can be inclusive and encourage economic growth. Or they can be extractive and become impediments to economic growth. Nations fail when they have extractive economic institutions, supported by extractive political institutions that impede and even block economic growth. But this means that the choice of institutions – that is, the politics of institutions – is central to our quest for understanding the reasons for the success and failure of nations. We have to understand why the politics of some societies lead to inclusive institutions that foster economic growth, while the politics of the vast majority of societies throughout history has led, and still leads today, to extractive institutions that hamper growth. I leave it to everybody to imagine where Manipur is or has been made to be. For me the biggest challenge facing Manipur today is decoupling interests from governance and couple it with ideas based on understanding of context.