To prevent the bysiness-cycle instabilities and ethical issues of laissez-faire, the mandarins in developing economies try to skip the laissez-faire stage, starting at a greater regulation level

Premature Imitation and India’s Flailing State. Shruti Rajagopalan and Alexander Tabarrok. The Independent Review, v. 24, n. 2, Fall 2019, pp. 165–186. http://www.independent.org/pdf/tir/tir_24_2_01_rajagopalan.pdf

There is the same contrast even between people; between the few highly westernized, trousered, natives educated in western universities, speaking western languages, and glorifying in Beethoven, Mill, Marx or Einstein, and the great mass of their countrymen who live in quite other worlds. —W. Arthur Lewis, “Economic Development with Unlimited Supplies of Labour”

Lant Pritchett(2009) has called India a flailing state. A flailing state is what happens when the principal cannot control its agents. The flailing state cannot implement its own plans and may have its plans actively subverted when its agents work at cross purposes. The Indian state flails because it is simultaneously too large and too small: too large because the Indian government attempts to legislate and regulate every aspect of citizens’ lives and too small because it lacks the resources and personnel to rule according to its ambitions. To explain the mismatch between the Indian state’s ambitions and its abilities, we point to the premature demands by Indian elite for policies more appropriate to a developed country. We illustrate with four case studies on maternity leave, housing policy, open defecation, and education policy. We then conclude by discussing how the problem of limited state capacity points to presumptive laissez-faire as a preferred governing and learning environment for developing countries. Matt Andrews, Lant Pritchett, and Michael Woolcock (2017) point to one explanation for India’s flailing state. In order to satisfy external actors, the Indian state and other recipients of foreign funding often take on tasks that overwhelm state capacity, leading to premature load bearing. As these authors put it, “By starting off with unrealistic expectations of the range, complexity, scale, and speed with which organizational capability can be built, external actors set both themselves and (more importantly) the governments they are attempting to assist to fail” (62). The expectations of external actors are only one source of imitation, however. Who people read, listen to, admire, learn from, and wish to emulate is also key. We argue that another factor driving inappropriate imitation is that the Indian intelligentsia—the top people involved in politics, the bureaucracy, universities, think tanks, foundations, and so forth—are closely connected with Anglo-American elites, sometimes even more closely than they are to the Indian populace. As a result, the Indian elite initiates and supports policies that appear to it to be normal even though such policies may have little relevance to the Indian population as a whole and may be wildly at odds with Indian state capacity. This kind of mimicry of what appear to be the best Western policies and practices is not necessarily ill intentioned. It might not be pursued to pacify external or internal actors, and it is not a deliberate attempt to exclude the majority of citizens from the democratic policy-making process. It is simply one by-product of the background within which the Indian intellectual class operates. The Indian elites are more likely, because of their background, to engage with global experts in policy dialogues that have little relevance to the commoner in India.

In the next sections, we discuss the flailing state and the demographics of the Indian elite. We then illustrate with case studies on maternity leave, housing policy, open defecation, and right-to-education policy how India passes laws and policies that make sense to the elite but are neither relevant nor beneficial to the vast majority of Indians. We conclude with a discussion of the optimal governing and learning environment when state capacity is limited.


Conclusion: Limited State Capacity Calls for Presumptive Laissez-Faire

The Indian state does not have enough capacity to implement all the rules and regulations that elites, trying to imitate the policies of developed economies, desire. The result is premature load bearing and a further breakdown in state capacity. It doesn’t follow that rule by non elites would be better. It could be worse. Nevertheless, there are some lessons about what kinds of things can and cannot be done with limited state capacity. States with limited capacity have great difficulty implementing tasks with performance goals that are difficult to measure and contested. In any bureaucracy, the agents involved ask themselves whether to perform according to the bureaucracy’s goals  or to their own. Incentives can ideally be structured so that goals align. But when states have limited capacity and performance goals are difficult to state or measure, it becomes easier for agents to act in their own interests.

At the broadest level, this suggests that states with limited capacity should rely more on markets even when markets are imperfect—presumptive laissez-faire. The market test isn’t perfect, but it is a test. Markets are the most salient alternative to state action, so when the cost of state action increases, markets should be used more often. Imagine, for example, that U.S. government spending had to be cut by a factor of ten. Would it make sense to cut all programs by 90 percent? Unlikely. Some programs and policies are of great value, but others should be undertaken only when state capacity and GDP per capita are higher. As Edward Glaeser quips, “A country that cannot provide clean water for its citizens should not be in the business of regulating film dialogue” (2011). A U.S. government funded at one-tenth the current level would optimally do many fewer things. So why doesn’t the Indian government do many fewer things? Indeed, when we look across time, we see governments providing more programs as average incomes rise. Over the past two hundred years, for example, the U.S. government has grown larger and taken on more tasks as U.S. average incomes have increased. But when we look across countries today, we do not see this pattern. Poor countries do not have notably smaller governments than rich countries. Indeed, poor countries often regulate more than rich countries (Djankov et al. 2002).

The differing patterns make sense from the perspective of the folk wisdom of much development economics. From this perspective, the fact that the developed economies might have started out more laissez-faire is an irrelevant historical observation. In fact, according to this view, because the developed economies have already evidently learned that laissez-faire led to inefficiencies, business-cycle instabilities, and environmental, distributional, and other ethical problems, it makes sense for the less-developed economies to skip the laissez-faire stage. Thus, the folk wisdom of development economics holds that what a developing economy learns from the history of developed economies is to avoid the mistakes of relative laissez-faire and begin with greater regulation.

In the alternative view put forward here, relative laissez-faire is a step to development, perhaps even a necessary step, even if the ultimate desired end point of development is a regulated, mixed economy. Presumptive laissez-faire is the optimal form of government for states with limited capacity and also the optimal learning environment for states to grow capacity. Under laissez-faire, wealth, education, trade, and trust can grow, which in turn will allow for greater regulation.