The Republic of institutions

Professors Jagdish Bhagwati and Amartya Sen are positioned on two sides of a Big Fight on the Internet: could India have improved human development indicators until it had increased economic growth following the 1991 reforms? Bhagwati is firm that economic growth must come first, to provide the money required for social side improvements. The other view is that since human development is an input for economic growth, it must have precedence.

This is a chicken-and-egg debate and misses the real issue: the ineffectiveness of the country's programmes to improve education, health, and social infrastructure. If 85 per cent of money that was spent for public benefit was wasted prior to the economic reforms, as Rajiv Gandhi said, and continues to be wasted even afterwards according to Rahul Gandhi, attention should be focused on the design and condition of the pipes. Not on whether there is enough water to fill the overhead tank, which is what some economists are debating.

Institutions and organisations are the machines and pipes that convert money into results. They must be redesigned to produce more bang for the buck and better outcomes for citizens. How to do this would be a more useful debate.

One school of thought proposes that the quality of public services will improve by handing them to the private sector, which, with its focus on efficiency and profits, will cut out the waste. The same school of thought also believes that environmental damage is caused by a "tragedy of the commons" when no one "owns" the water, the forests, and the atmosphere. It believes that creation of private property rights (including tradable rights to pollute the atmosphere) will induce human beings to behave more responsibly.

The basic premise of this school is that a market in which self-interested persons can trade, will always produce good outcomes. It believes that institutions for progress must be founded on principles of private property rights and competition.

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