South beats North on Governance
Posted on: December 18 2009 | Author: megha | Comments:0
A 2009 World Bank report ranked India 122nd—after Pakistan, Bangladesh, Nepal—in a list of 188 countries on the ease of doing business. It placed India at almost the bottom of the ladder on the environment for doing business. As one example, according to a standing committee report, there are judicial cases pending in India since 1950. To try to improve the legal climate in the country, the government is attempting to introduce legislation for setting up commercial courts in the winter session. According to the proposed legislation, a commercial bench will be attached to each high court to ensure that high-value disputes (where the dispute is of Rs 2 crore or more) are put on the fast track. The government’s aim is to bring down the average span of litigation from the present 15 years to 3 years. Judging by India’s ranking, similar reforms are required in almost all aspects of the country’s governance.
Governance reform is essential as it can create an enabling environment for the economic and social development of a country. A rise in pending court cases, for example, reflects a growing number of disputes in society or the judiciary’s failure to deal with them efficiently. Potential investors view this as a negative factor. Barriers to dispute settlement and the resolution of legal problems slow down growth and development because they add to the costs of engaging in economic and social activities, increase uncertainty, and reduce public confidence in the larger legal governance system. While the problem with overall governance need not be uniform across the country, once faith in key public institutions is shaken, it is difficult to attract investors and other development actors who need to allocate, augment and manage resources.
In a recent study we have completed, we find that India’s southern states have performed distinctly better than their northern counterparts on a variety of economic, social and political indicators. This was not the case half a century ago. But there is now a marked upward shift in per capita income and reduction in poverty in the southern states (Karnataka, TN, Kerala and AP) when compared to the northern states (Bihar, MP, Rajasthan, and UP) since the mid-1980s. Southern states have also attracted much more investment than their northern counterparts.
We attempted to find answers to this divergence in performance, considering many factors (monetary and non-monetary) of which governance is the most relevant here. We limited our choice to three dimensions of the quality of governance: political stability as measured by the tenure of CMs (the hypothesis being that the longer the CM’s tenure, the more conducive it is for investment and economic activity to occur), law & order as measured by police firings, and the functioning of the judiciary as measured by pending cases in court.
We found that the average tenure of the CM in both UP and TN declined respectively from 1,748 and 1,692 days in the 1950s to 390 and 1,058 days in the current decade, but, as is clear, the decline is much greater in UP than in TN. Attention to policymaking and implementation, and public service delivery would have suffered far more in UP than in TN as a result of the frequent changes in the CM’s tenure.
Turning to law & order, we found police firings per million population were significantly higher in UP than in TN during 1988-2004. Because firings are widely reported, and add to uncertainty in the minds of the public, they can adversely impact the functioning of a society and its economic enterprises.
Finally, with respect to judicial reform, we found the percentage of pending cases in UP courts (79% on average during 1991-2006) was much higher than that in TN (which only averaged 59% in the same period). In TN, there was also a marginal reduction in the percentage of pending cases (-0.29%), while these increased in UP by 0.75% per year. In short, the functioning of the judiciary worsened in UP while it improved somewhat in TN. Even in the southern region as a whole (TN, Karnataka, AP and Kerala), the percentage of pending cases in the courts was much lower with the weighted average being 67% during 1991-2004, as compared to the northern region (Bihar, MP, Rajasthan, UP, Jharkhand, Uttarakhand and Chhattisgarh) where it was 79%.
This empirically confirms what many observers have intuitively surmised, that the northern states’ governance track record remains well below that of the southern states. The average tenure of CMs in the northern states is much lower than that in the southern states with the result that stability in policymaking suffers much more. Second, we have found that law & order (measured by police firings per million population) is much more stable in the southern states when compared with their northern counterparts. Finally, as far as judicial reform goes, the northern states have a much longer way to go than the southern states, measured in terms of the percentage of pending cases.
These are important findings since the most difficult factors to import or substitute are in the area of governance. Skilled labour and technology can be imported. Substitutes can be found to make up for infrastructure gaps. Power shortage can be relieved through the use of generators or of a national grid. Railways may make up when roads fail. But political regime change is not an option for investors. If political instability or law & order problems are more severe in one state, economic actors have no option in the short run but to live with the quality of governance available in the state once they decide to invest there. Viewed thus, governance system and practices are the least mobile of the factors impacting economic growth.
- This article is coauthored by Dr. Samuel Paul and Kala Seetharam Sridhar. The authors are with Public Affairs Centre, Bangalore. Views are personal.
This article was carried in today’s Financial Express and is available here. The full North-South study can be found here.
Dr. S L Rao, former Director-General of the National Council for Applied Economic Research, had also authored a comprehensive review of PAC's North-South study in an article in The Telegraph (Kolkata).