UCI Build a More Effective Indian State Book Discussion

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Write a book review of ~1500 words (~7 double spaced pages) of the book “Building a More Effective Indian State” whose draft chapters you have read for this class. In the chapter responses, you were showing your understanding of the ideas to me, whereas here you should write to synthesize the core ideas and points in the book for a third-party who may have no background or deep interest in the material, but who you are trying to convey the ideas to a. Imagine writing for your parents or your roommate or college friend who is not an economics major but would be willing to read your writing b. In fact, I would encourage you to send your final assignment to your parents to provide them with a sense of what you’ve learnt this quarter! 2) Your goal is to (i) succinctly convey the main ideas of the book for those who may not read the book, and to (ii) provide your own take on the strengths and weaknesses of the book on the basis of which the reader can make an informed decision on whether they want to buy and read the full book 3) It is more difficult to write well and concisely than verbosely and so you should aim to stick to ~1500 words (though you can go a little over if needed). I recommend that you write a set of core ideas/bullet points and give yourself time to re-read and edit it at least 2-3 times!

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Chapter 2: The Politician’s Predicament1
A lingering puzzle about modern India is that despite being a democracy, political
leaders do not seem to prioritize delivering basic services to all citizens. In theory,
elections should enable voters to hold political leaders accountable for performance. In
practice, the Indian state struggles to perform its basic functions and deliver essential
services. In many ways, the facts on weak service delivery outlined in Chapter 1 seem
to be an indictment of Indian democracy.
However, in assessing Indian democracy, it is important to note that India is unique in
modern history as a country that adopted democracy based on universal adult franchise
at a much lower level of per-capita income and state capacity than most other modern
democracies. India’s choice of “democracy before development” has in turn created a
unique set of political incentives and constraints.
First, it has created voter demand for and political supply of a welfare state at a much
lower level of fiscal and administrative capacity than other modern welfare states. The
problem is not welfare spending per se. In fact, as we will see in chapters 6 and 15,
well-designed and implemented welfare programs can often improve both equity and
productivity. Rather, the problem is the low quality of much of our welfare spending
(which, in turn is driven by weak state capacity). Combined with India’s low tax-to-GDP
ratio, this has squeezed funds for making productivity-enhancing investments including
investing in the capacity of the state itself. Thus, there is a vicious cycle between weak
state capacity, poor quality of expenditure, and lack of funds to invest in state capacity.
Second, in a situation where the state is unable to effectively deliver for all citizens, it
often makes political sense to direct the limited resources of the state to narrow groups
of base voters as opposed to expanding state capacity to better serve all citizens. This
phenomenon is referred to in political science as clientelism and is commonly described
in India as vote-bank politics. As we’ll see in this chapter, lack of state capacity
contributes to politicians focusing on vote-bank politics; and their actions in pursuit of
vote-banks further weakens state capacity. In other words, weak state capacity and
vote-bank politics are closely related, and exacerbate each other in a vicious cycle.
These two vicious cycles capture the core of the politician’s predicament in India. They
are under pressure to deliver on a wide variety of voter demands, but the state they
govern lacks the fiscal and administrative capacity to do so effectively for all citizens.
1
Draft chapter from the book “Making Government Work Better: A State-led Agenda for India” by Karthik
Muralidharan (kamurali@ucsd.edu). This draft is made available for comments only.
PLEASE DO NOT CITE OR CIRCULATE WITHOUT PERMISSION OF THE AUTHOR.
1
This creates incentives for both voters and politicians to focus on vote-bank politics.
However, vote-bank politics is often zero-sum in nature because state benefits that go
to one group cannot go to another. In contrast, a politics of investing in state capacity
and service-delivery can make everyone better off. But making this transition is difficult
because of the nature of political incentives described further in this chapter.
Thus, on the positive side, Indian democracy has given voice to the aspirations of a
much broader set of citizens to make a claim on the state’s resources than has been the
case at historically comparable levels of development. On the other hand, electoral
democracy in practice has not provided enough incentives to the political class to invest
in expanding the capacity of the state to satisfy those claims.
The fundamental challenge that Indian democracy has to overcome to deliver better
outcomes for all citizens is the following: “how do we move from a politics that rewards
cultivating vote-banks to a politics that rewards leaders who deliver better growth and
public services for all?” I am cautiously optimistic that India is ripe for such a transition -for a variety of reasons as explained in this chapter. But India’s ability to make this
transition is itself constrained by weak state capacity because politicians cannot credibly
campaign on a platform of broad-based growth and service delivery if the state they
lead cannot effectively deliver on this promise. We therefore need to make the political
case for investing in state capacity to break out of the vicious cycles discussed above,
and accelerate this transition.
This chapter has three main goals. The first is to place Indian democracy in a global
historical perspective and provide insights into the unique challenges faced by Indian
politicians as a result of India’s historically unprecedented choice of “democracy before
development”. The second is to explain the key constraints and incentives that Indian
politicians function under and how these can often lead their actions to deviate from the
public interest. The third is to explain why it should be politically attractive and feasible
to invest in state capacity, and implement the reform agenda outlined in this book.
1 Indian democracy in global historical perspective
1.1. The evolution of the modern state
The role of the state has evolved over time, and can be categorized into three broad
phases.2 First, and for most of their history, modern states have functioned primarily as
“security” states, whose focus was on external defense and internal law and order. This
was a natural response to the existential threat faced by civilizations throughout history:
2
This section presents a short synthesis of a vast academic literature on historical political economy.
2
risk of invasion, plunder, and slaughter or enslavement. Correspondingly, the central
function that early and medieval states took on was to protect their inhabitants.
One striking way of seeing this is that military spending routinely accounted for 70-90%
of current spending in national budgets (excluding interest and major capital projects) of
several European countries in the 17th century.3 Correspondingly, the capacity of the
state to raise tax revenue was also augmented before and during wars.4 In the famous
words of historian Charles Tilly, “War made the state, and the state made War.”5
Next, the Industrial Revolution in the 19th century heralded a gradual shift in the nature
of the state beyond fighting wars to supporting broader economic growth. In this phase,
“industrial” states started spending a lot more on public infrastructure to enhance
productivity, such as roads, railways, ports, and sanitation and sewage systems. The
rise of mass production after the Industrial Revolution sharply increased the public
returns to building such infrastructure.6 This enabled a virtuous cycle whereby the state
used tax revenues (and debt) to build productivity-enhancing infrastructure, which drove
increases in both output and future tax revenues. These revenues could then be used to
strengthen the military further and to pay back the debt issued to fund capital
expenditure. This shift in state focus first took place in Britain but spread to other
Western countries along with the spread of the Industrial Revolution.7
Until the emergence of industrial states, most of the world was stuck in a “Malthusian
trap” where productivity gains were primarily absorbed by population growth, with GDP
3
See Pincus and Robinson (2016) for a detailed discussion and references to individual studies
estimating the share of military expenditure across France, Russia, Austria, and Holland in the 17th
century (all of which ranged from 75-90%). While historical data is more limited, studies cited by PIncus
and Robinson (2016) have estimated that states in ancient Rome and Egypt also spent around 80% of
their revenue on the military.
4
As noted on page 112 in Giddens (1985), “it was war and preparation for war that provided the most
potent energizing stimulus for the concentration of administrative resources and fiscal reorganization” (of
early modern states). This view has been reinforced in several later works including Besley and Persson
(2009) who note that: “war placed a premium on sources of taxation and created incentives for
governments to invest in revenue raising institutions.”
5
Tilly (1975), p42.
6
Key features of the Industrial revolution included, mechanization, division of labor, and specialization,
which greatly increased economies of scale in production. Thus, it became much more cost effective to
produce at large scales in a few locations and transport these goods to others, which greatly raised the
economic returns to building better transportation infrastructure.
7
As noted by Pincus and Robinson (2016): “The eighteenth century British state was the first European
state to begin to shift the balance away from fiscal-military expenditures and towards other budget items
that promoted colonial development, education, (and) the development of infrastructure.” They also note
that the productivity gains enabled by these investments allowed Britain to “transform its military into the
world’s foremost fighting machine and simultaneously spend a relatively smaller percentage of the budget
on exclusively fiscal-military matters.”
3
per capita mostly remaining stagnant.8 With the Industrial Revolution and corresponding
public investment in infrastructure and mass public education, this changed and GDP
per capita and average living standards began growing systematically for the first time
in recorded human history. However, this growth in income was also accompanied by
growing inequality as the gains from productivity growth disproportionately accrued to
the classes who possessed land, capital, and/or knowledge.
It is only in the last 100 years that we see the emergence of the third phase of the state,
which is the “welfare” state. During this phase, governments launched programs to
share the gains from productivity growth more broadly, and to protect citizens from
various risks and vulnerabilities. Examples include social security or pensions for the
elderly, food security for the poor, government-provided health insurance or healthcare,
and unemployment or disability insurance. These programs took root in Western
democracies in the 1930s after the Great Depression and expanded sharply in the
1950s and 60s after World War II (see Figure 1.1).9
Figure 1.1
Source: OECD
A key point to note is that welfare states are very expensive and were historically built
only after countries had grown rich or at least achieved middle-income status. However,
once the shift to a welfare state started, the share of the government budget devoted to
8
Note that the quality of life of kings, and ruling classes did grow in this period because an expanding
population increased tax revenue to finance more opulent lifestyles for them. However, the quality of life
of the average citizen or peasant improved much less in the pre-Industrial period (Clark 2007).
9
This expansion also helps to explain the phenomenon of the Kuznets curve (observed by Nobel Prize
winning economist Simon Kuznets), whereby there is an inverted-U relation between the countries’ level
of GDP per capita and inequality. At low levels of income, inequality is low because most people are poor.
The process of industrialization and growth increased inequality with sharp increases in income and
wealth for industrialists, financiers, and the professional class. Finally, at higher levels of income the
government stepped in to redistribute resources to the poor through the welfare state, which contributed
to a reduction in inequality.
4
welfare in western democracies has steadily increased over time. Welfare spending
now accounts for 20-30% of GDP, and over 50% of the national budget in many
high-income democracies.
Of course, these three functions of the state are not mutually exclusive. Security states
also built roads, and occasionally had welfare programs, and welfare states also spent
on the military. So the three phases of the state are best seen as representing the
relative importance given to these three functions, measured by the share of national
income and budgets allocated to security, productivity-enhancing public goods, and
welfare or redistribution respectively.
This historical evolution of the state across the three phases is also strongly correlated
with the extent of democracy, measured by the fraction (and composition) of the
population who have a say in determining who governs them. Specifically, security
states were designed to primarily serve the interests of kings, nobles, and the ruling
classes, and are strongly correlated with non-democratic governments even today.
Individuals had very few rights or protections from arbitrary actions of the state, and the
government typically did little for public welfare other than provide security.10
The industrial state benefited a greater number of citizens but disproportionately
benefited land owners, capitalists, and professional classes. For instance, building
roads and railways helps the poor over time through better market integration and lower
prices, but in the short term it primarily benefits those who own capital and land, whose
value appreciates sharply when infrastructure is built. It is therefore not a coincidence
that the period of industrial states is correlated with times of limited democracy. For
example, though the US and UK were “democracies” in the 19th century, the vote was
highly restricted and concentrated among those who were educated and owned land or
property. These voters would be more inclined to support productivity-enhancing
infrastructure investments that they would benefit disproportionately from.
It was only after years of struggle that women, minorities, and the working classes won
the right to vote in Western democracies, and it is only in the last 100 years (or less)
that these countries adopted universal adult franchise.11 A large body of research shows
that expanding the franchise to marginalized groups is correlated with greater welfare
10
Rulers and elites also routinely violated individual rights and exploited their citizens in the name of
providing “security.” While distasteful, the philosopher Thomas Hobbes provided a moral justification for
the “security state” by noting that it was still an improvement over the alternative “state of nature”. As he
famously described it, the life of humans in the state of nature would be “nasty, brutish, and short”
(Hobbes 1651). Thus, Hobbes argued that individuals would be better off by entering into a “social
contract” where they subsumed their individual rights to the sovereign, to enable the king and his forces to
better protect life and basic liberty by providing security.
11
See for instance Keyssar (2000) on the struggle to expand the right to vote in the US.
5
spending. These groups typically have below-average incomes, and therefore benefit
from greater welfare and redistribution. This naturally makes them more likely to vote in
favour of parties and candidates that prioritize spending on welfare.12 Thus, it is not
surprising that the modern welfare state has mainly emerged in the last 100 years, at a
time when voting rights have expanded both within and across countries.13
1.2 Indian exceptionalism and its consequences
A core challenge for India is that we have tried to compress all three phases of the state
into the 75-year period since independence, whereas most Western democracies took
several hundreds of years to build states that could effectively perform all three roles.
Crucially, we have tried to build a welfare state at a much lower level of national income,
tax-to-GDP ratio, and administrative capacity than today’s developed countries had
when they launched their welfare states.
There are two key reasons why India has tried to build a welfare state before reaching
even middle-income status, one related to ideas and one to incentives. The first is that
Indian elites (who disproportionately influence the public discourse) have often been
educated in or at least exposed to the West. This was true of several leading figures of
the independence movement including Gandhi, Nehru, and Ambedkar, and continues to
be true among Indian elites today. This exposure leads to a natural appreciation for the
benefits of a modern welfare state, and a desire to replicate these ideas in India (even
at much lower levels of income and state capacity).14
A second, and more important, reason is India’s decision to adopt a political system of
universal adult franchise at Independence. Most countries became more democratic as
they grew richer. India, however, started highly democratic and has stayed mostly
democratic throughout its 75-year post-independence history (see Figure 1.2). Thus,
India is a unique historic exception because few of today’s high-income countries were
12
Musgrave (1967) documents the expansion of public spending on welfare programs after the expansion
of suffrage. Husted and Kenny (1997) test various models of why welfare spending should expand in
response to an expanded franchise with US data and find support for a “redistributive” model whereby
shifting the median voter to one with lower income (which is what franchise expansions have typically
done) increases welfare spending. Haggard and Kaufman (2008) provide a comprehensive assessment
of the link between expansion of voting rights and welfare spending across Latin America, East Asia, and
Eastern Europe and also confirm that these are positively correlated. Fujiwara (2015) uses a natural
experiment in Brazil to show that the expansion of effective voting rights of less educated voters (due to
the introduction of a new voting technology) led to an expansion of healthcare spending, which is
particularly beneficial to the poor.
13
The central connection between voting rights and welfare spending is also seen in the ongoing attempts
by conservative groups in the US (who favor reduced welfare spending) to make voting more difficult for
economically-disadvantaged minorities (see Woodwell 2019 for a discussion).
14
See Rajagopalan and Tabarrok (2019) for an illustrative discussion.
6
anywhere near India’s level of democracy when they were at a comparable level of
per-capita income15.
Figure 1.2
Source: Lamba and Subramanian (2020)
India’s decision to grant universal adult franchise to all citizens, regardless of education
or other qualifications, at Independence is a great moral triumph that is unprecedented
in human history. Despite being “democracies”, western nations like the U.S. and the
U.K. systematically excluded a large fraction of their population from having a vote in
the 18th and 19th centuries. Further, the wealth of these nations was built at least in
part on the back of extreme exploitation of either slaves (in the U.S.) or the colonies (in
the case of the U.K). This is why India’s democracy based on universal adult franchise that gave a voice to the most marginalized groups in society – is a signature
achievement, and one that we should all be proud of.
Consistent with the correlation between the extent of democracy and welfare spending,
“democracy before development” in India has created strong political pressure and
incentives for welfare spending at a much lower level of per capita income. For
15
Many political scientists have noted that the adoption and persistence of democracy in India is a deep
puzzle, and a large body of research has tried to understand this “exceptional” phenomenon. While it is
important to understand the causes of Indian democracy, my focus here is on its consequences. See
Varshney (2013) for an illustrative discussion of why democracy took root and survives in India.
7
example, the United States introduced the food stamp program to provide food security
to the poor in the 1930s when its GDP per capita was ~ US$8,000. In contrast, India
introduced the public distribution system (PDS) for food security in the 1960s with a
GDP per capita of ~ US$800, a tenth of the corresponding figure for the U.S. This is
again something we should be proud of as a moral achievement of our society, which
was enabled by India’s universal-franchise democracy.
At the same time, the political pressure for welfare spending has created two key
challenges for India’s ability to meet the aspirations of its people. The first is a public
finance challenge, and the second is a political incentives challenge. While they are
distinct, these two challenges also reinforce each other.
The public finance challenge is the following: given India’s low GDP/capita and low
tax-to-GDP ratio (compared to western democracies), the pressure for welfare spending
has sharply limited the resources available to invest in productivity-enhancing public
goods — which was the primary focus of today’s developed countries as they went
through the phase of becoming industrial states. In India, the squeezing of funds for
public goods is seen both in the underinvestment in infrastructure, and in the chronic
underinvestment in the capacity of the state itself.
This tension is well illustrated by the case of Indian Railways. For several decades after
Independence, politicians across parties have prioritized keeping passenger fares far
below costs to enable the poor to access rail travel. However, this came at the cost of
not investing in infrastructure and over-charging for freight traffic to cross-subsidize low
passenger fares. Over time, these choices have contributed to high logistics costs for
Indian industry, which hurts the poor both in the form of higher prices, and fewer betterpaying jobs because of the reduced competitiveness of Indian firms (see Chapter 16).
Similar examples are seen in the case of water and electricity, which are often provided
for free, which contributes to underinvestment and poorer quality of services over time.
Of course, it is a democratic imperative to provide access to essential services to those
who cannot afford them. But, India’s low resource base increases the importance of
designing cost-effective strategies to promote access and implementing them well.
However, as discussed in chapter 6, this is a key area where we have fallen short. In
turn, poor program design and implementation itself reflects weak state capacity,
exacerbating a vicious cycle between weak state capacity, poor quality of spending, and
lack of funds to invest in state capacity. This is partly why the rate of return on state
capacity investments is often ten times greater than the cost (as shown in Chapter 1).
8
The question then is why politicians have not prioritized making these investments in
state capacity despite the returns to doing so being so high? We now turn to
understanding the second challenge of Indian democracy (of political incentives) better.
2. Understanding political incentives and constraints
2.1 The status quo incentivizes narrowly-targeted policies and vote-bank politics
A key mechanism through which democracy should improve governance and service
delivery is elections. If parties and leaders serve citizens well, citizen satisfaction should
translate to electoral success for them. The way in which elections are conducted,
however, can substantially affect how voter preferences are reflected and aggregated in
a government and in its policy priorities.
India follows a first past the post election system, in which the winner of a seat is the
candidate with the most votes, regardless of the percentage of votes won. If an election
has several contestants, the winning candidate can often win with far fewer than 50% of
votes cast. Further, since voter turnout in Indian elections is 60-70% (and often lower),
candidates can often win with the support of less than 25% of the electorate.16 For
example, from 1991-2002 in Uttar Pradesh there were an average of 20 candidates per
seat during the General Elections. The average vote share of the winning candidate
was 37% and the average voter turnout was 50%. Thus, many candidates won with the
support of less than 20% of the electorate.17
This electoral calculus has profound implications for political incentives. Consider a
politician who has a public budget of Rs. 1000 to spend across 100 voters. He can
invest in a public good (such as state capacity) that increases the value of the
investment to Rs. 1200 and generates a total value of Rs. 12 each for all voters. Or he
can redistribute the money (with a 10% administrative cost) and provide Rs. 36 each to
25 “base” voters, and zero to the other 75. The second option reduces the size of the
pie to Rs. 900 and so the first option generates greater social value (Rs. 1200 vs 900).
However, if only 20-25% of voters are needed to win (after accounting for turnout), the
second strategy is politically more attractive – especially because Rs. 36 is three times
greater than Rs. 12, and hence more likely to motivate base voters to turnout and vote.
Thus, a key implication of FPTP (especially in settings with multiple contestants for each
seat) is that it is often more electorally advantageous to cultivate a dedicated group of
16
For instance, the last two national elections (2014 and 2019) saw an average of 15 contestants per seat
across the country. Average voter turnout in the 2019 national election was 67%.
17
All election data reported in this chapter were obtained from the Trivedi Center for Political Data.
9
base voters (who care enough to show up and vote) than to appeal to a broad base of
voters. In political science terminology, this results in politics based on clientelism
(defined as targeting public benefits toward preferred voter groups) rather than
broad-based service delivery. The latter results in smaller improvements for all, while
targeting base voters leads to larger improvements for a few that are more easily
attributable to the politicians in question. These beneficiaries then vote for politicians
they perceive as having contributed to these changes.18
In India, clientelism is often described as vote-bank politics, where politicians and
parties cultivate dedicated demographic subgroups (typically based on caste, region, or
religion) and focus mainly on serving these groups (rather than the broader public
interest) when they hold office. Vote-bank politics has been so common in India that
many politicians are remembered by the acronyms representing their political coalitions
rather than their policies. Examples include, the AJGAR (Ahir, Jat, Gurjar, Rajput)
grouping assembled by Charan Singh in the 1970s in Uttar Pradesh, Madhavsinh
Solanki’s KHAM (Kshatriya, Harijan, Adivasi, Muslim) coalition in Gujarat in the 1980s,
and the MY+ (Muslims, Yadavs, plus a few small groups) strategy of Mulayam Singh
Yadav in UP and Lalu Prasad Yadav in Bihar in the 1990s and early 2000s.
Weak state capacity and vote-bank politics can reinforce each other in a vicious cycle.
Because weak states cannot credibly deliver services well to all citizens (and neither
politicians nor voters think that investing in state capacity will yield results soon
enough), voters often support parties and candidates who can quickly and visibly direct
the resources of the state to their group. Politicians in turn build their power base by
representing the interests of specific groups (typically those with whom they share an
identity), rather than the population at large. Reflecting the expectations of their voters,
they use their time in office to reward their base voters rather than invest in improving
broad-based governance. This underinvestment then perpetuates the cycle of weak
state capacity and vote-bank politics.
A good example of this vicious cycle is provided by the tenure of Lalu Prasad Yadav as
Chief Minister of Bihar in the 1990s. Both journalistic accounts and academic research
have documented widespread atrophy in governance during this period.19 However,
what is less well known is that programs targeting the welfare of Yadavs and Muslims
(Mr Yadav’s two main “vote banks”) functioned relatively well in this period.20
18
The point that politicians can often find it more electorally advantageous to concentrate public benefits
on a narrower group of voters is well-documented in the academic literature. See Lizzeri and Persico
(2001) and Besley and Persson (2009) for illustrative examples.
19
See Thakur (2000) and Mathew and Moore (2011) for illustrative discussions.
20
See Mathew and Moore (2011). Specifically, the Yadav community benefited disproportionately from
government spending and hiring, and the main benefit provided to the Muslim community was physical
safety with the police being instructed to prioritize preventing communal violence.
10
Importantly, his approach was legitimized in the minds of his base voters because
previous governments had primarily catered to other more privileged groups. For
instance, Mr Yadav would tell his supporters that his government did not invest in roads,
because doing so would only benefit contractors and the wealthy, who had cars. Thus,
by directing the limited resources of the state towards his loyal base voters, Mr. Yadav
could still get re-elected, despite poor overall performance.
The central role of the FPTP system in his re-election is seen by noting that in the 1995
state elections, his party (Janata Dal) won with just 34.27% of votes cast. Because
turnout was 59%, he won with the support of just 20.2% of registered voters. Thus,
under the FPTP system, it is possible for politicians to win with intense support from
smaller groups (who are also more likely to vote) than with diffused support among
more people (which is often not strong enough to get them to vote).
The value of having intense support among one’s base voters also creates political
incentives for polarization. Voters are more likely to show up to vote for a party if they
believe that only “their” party will serve their interests, and even more so if they believe
that having other parties in office is a threat to them. Politicians therefore have an
incentive to increase the intensity of voters’ preferences for their own caste, region, or
religion, and make them regard the other groups and parties as enemies. While this
may yield electoral dividends, it makes it more difficult to get groups to work together
after elections and build broad coalitions for improving overall state effectiveness.
This dynamic is exacerbated by India’s diversity across multiple dimensions including
language, region, religion, and caste — and the additional challenge of caste-based
social hierarchies, which have made it harder for groups to work together. A large
literature in political science and economics has documented that places with greater
ethno-linguistic diversity have found it more difficult to build the broad-based coalitions
and trust that are conducive to a politics of “public goods”.21 Such settings of low trust
across groups are more likely to encourage a politics of patr