The persistence of underdevelopment: Raghuram Rajan

Although I haven't been able to completely read or understand this paper, some parts of it sound really interesting. Raghuram Rajan is director of research at IMF, and has proposed an explanation of why countries like India and Mexico, which are "vibrant democracies", are still plagued with underdevelopment. Why do people choose poverty, is the question under concern!

It assumes that comprehensive reforms, defined as (pro-market reforms) + (education for all), are needed for the collective development of different groups of people. This seems to be justified because without education, the uneducated would not be able to take advantage of the pro-market reforms. And pro-market reforms are in general considered to be good because they promote competition and lead to lower prices for goods and services.

Then it goes on to show that educational reforms might never happen because of the diverse interests of different groups of people. For example, the uneducated people might vote for them, but the educated people would want to preserve their elite status. Or, even if the reforms do get voted through, their success would depend upon factors such as the price of educational services, which are again provided by the educated people.

In the absense of educational reforms, the pro-market reforms would never gain consensus. This is because (a) without education, the uneducated would not be able to take advantage of the opportunities created by pro-market reforms, and (b) pro-market reforms would create additional employment for the educated, which would lead to higher prices for services such as healthcare provided to the uneducated by the educated. Thus, the real wage of the uneducated might actually decrease with pro-market reforms.

The bottomline is that different groups of people want to preserve their current rents, while also trying to expand their opportunities. But opportunity expansion is always good for some and bad for some, and everybody cannot preserve their rents. As a result, the people "may act like crabs in a bucket, willing to pull down any crab that appears to be climbing out, with the active help of the elite oligopolist, who prefers them all to stay in the bucket. The oligopolist may even forego some reforms that could enhance his rents, for fear that they would unify the crabs in the bucket and allow them to overwhelm him."

The general suggestions for policy formulation are not different from what we already know: pro-market reforms should be accompanied with reasonable endowments for education to different groups of people. However, this is easier said than done. What is a "reasonable endowment"? What should be the sequencing of pro-market reforms and endowments for education? How can the government persuade diverse groups of people to follow a coordinated reform process? The last question indeed seems to be the crux of the problem, to persuade uncoordinated masses of uneducated and educated people to think in a coordinated manner. Even the other questions are not answered in a straight-forward manner because economics and its implementation is still a science (?) under development.

Although this is a highly academic paper, I think it provides a framework to understand the complexities of much that is going on in India these days, especially with regard to OBC reservations, SEZ expansions, the Narmada Bachao Andalon, etc. And it shows that it is wrong to analyze these problems from highly simplified viewpoints such as corrupt politics, or manipulative corporations, or "irrational mobs" in a democracy. In fact, they subsume the media, civil services, democratic politics, economics, and what not. An utterly complex world that humans have woven for themselves! Small can indeed be beautiful :)