Friday, April 11, 2008

Productivity & Regulatory Constraints [Opportunities for the Left?]

Shyam Ponappa / New Delhi February 01, 2007

Productivity, Regulatory Constraints & the Left: Could a workable form of Social Democracy evolve in India?

Regulatory Constraints

In my previous column, I mentioned a McKinsey report about how fixing India's regulations could improve productivity by 61 per cent. The figure below shows their estimate of how much poor regulation constrains productivity.


Constructive Opportunities for the Left?

Despite its record, the Left in India today has unprecedented scope for influencing constructive change, while substantially enlarging its constituency. The Left's reorientation away from adversarial class war was the second of four change areas identified in my previous article, with the government's need to change from ruler to facilitator being the first. In West Bengal, the Left has already initiated some difficult constructive steps to revive economic growth. CPI (M) General Secretary Prakash Karat reportedly says that their challenge is to achieve economic development in a manner that benefits the people. Their potential for positive influence far exceeds the ambit of the states where the Left has a majority. However, to realise this, the Left will probably have to realign itself to develop a kind of social democracy in India.

This scope for influencing policy has come about because fractious politics ensures that we will have extensive coalitions in power, with the Left having a significant role for better or worse, whether as participants, supporters, or in the opposition. While the Left can obstruct, disrupt, or hold back through confrontation as in the past, its capacity to influence actions in the broad public interest is now unprecedented, provided there is a conscious evolution towards a broad, inclusive social democracy. This is because other parties -- the Congress, the JD, and the BJP -- have failed in developing appropriate systems and institutions that deliver the governance people could expect, i.e. in addition to law and order, the enabling and facilitating infrastructure that people need to be productive and have a reasonable quality of life. While necessary, the Left's realignment is not sufficient, as other stakeholders -- individuals as owners, workers/managers/professionals, politicians, and all members of society -- have to collaborate actively for a good composite outcome. Therefore, developments modelled on the balanced achievements of well-functioning social democracies, e.g., in the Scandinavian countries or the Netherlands, are likely to appeal not only to the Left's traditional constituents, but also to a broad set of liberals. Many in India are beginning to show a willingness to make efforts to improve their society and living conditions, rather than tolerate the filth and shoddiness that go with the inequities and disparities we have had so far. We need to develop this path that we don't yet have.

To realise its potential, the Left has to engage with society for inclusive constructive change. As in West Bengal, this means turning away from its historical role of advocating class conflict. Instead, the Left can help to evolve a form of social democracy that makes sense for India.

The areas that need radical change and require multipartisan efforts to engage in developing workable solutions for India's varying local circumstances are:

a) Works councils that are inclusive and collaborative as in the Netherlands, in place of confrontational unionism. Game theory posits that a collaborative outcome will always improve on a competitive approach, which results in the minimal Nash equilibrium (see "Tata's Corus Buy", Business Standard, November 3, 2006). The rationale is the same as for corporate alliances, e.g. Tata and Corus.

b) A more equitable solution to the acquisition of land for development. The Left could champion an approach based on the analogy of equity stakes in urban land development, e.g., tenants getting apartments on conversion to highrises. Similar principles can be applied to rural land acquisition, although the details of what is paid up-front as against continuing equity in the development will need some financial engineering. There is also a distinct need to ensure that compensation policies are effectively implemented.

c) A concerted long-term effort addressing the policy framework for enabling infrastructure. This needs a systematic makeover in every major aspect addressed, e.g., energy, communications, transportation, basic health including water and sanitation, and basic education. For each of these, the entire gamut needs to be made over, comprising an integrated system of policy aims with requisite laws, rules, procedures, practices, and institutions for execution and maintenance.

d) Getting It Right: We have to be honest with ourselves, rather than indulge in overeager self-congratulation (e.g., see Sunil Jain:* "...a host of regulatory decisions that have been one-sided, in areas like telecom especially..."). If you wonder that the rhetoric of several rounds of liberalisation resulted in such messy outcomes, it helps to scrutinise each step in the whole chain relating to a sector in each round to identify the flaws. It is good to see a glass as half-full, but not if we shortchange ourselves in setting up poor systems. These systems are like structures: build on political accommodation coupled with incompetence instead of economic logic, and the edifice collapses or is dysfunctional (imagine a massive physical edifice built on political compromise instead of engineering principles).

Quality of Life

If you are impressed with the telecommunications revolution in India, consider how much more effective countrywide broadband services would be for delivering everything from education to health care and entertainment, as well as marshalling productive capacities across our vast distances, to know what we are missing with our hodge-podge approach -- bad connections, slow speed, intermittent failure, even in Delhi. The policy and regulatory framework needs to be built with system integrity to be effective. This can greatly improve the ability of vast numbers of our people to access learning and health care, interact with each other, function productively, and contribute in manifold ways to efficiency and convenience, important aspects of the quality of life.

No political party or government has acted systematically to correct these shortcomings, neither in telecommunications, nor in any other sector -- except possibly the new Automotive Mission Plan 2006-16. The ultra mega power projects are one-offs for power; they do not address the absence of a systemic solution.

Could the Left channel its organisation and energies to provide this lead while seeking multipartisan inputs to raise our quality of life?

* 'Why have regulators?' Business Standard, January 22, 2007.

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