If industrialisation is the major driver of economic growth, then areas that are in proximity to inputs of production, such as mines, should be the most prosperous. However, the evidences across states of India defeat this hypothesis.
Odisha accounted for 44 per cent of the value of minerals produced in India in 2021-22, but its share of net state value added by industrial activity (NSVAIA) was 4 per cent and the share of gross domestic product (GDP) in the country was just 2.8 per cent.
It ranked first in terms of value of production of minerals but 8th in NSVAIA, 14th in gross state domestic product (GSDP) and 22nd in per capita net state domestic product (PCNSDP).
A similar contrasting pattern can be observed for Chhattisgarh and Jharkhand, ranked 2nd and 5th in the share of value of mineral production. On the contrary, Maharashtra accounted for only 1.5 per cent of the value of minerals but 12 per cent of NSVAIA and 13 per cent of the country's GDP. It ranked 7th in the value of minerals production but 2nd in NSVAIA and 1st in GSDP.
To solve the puzzle, we need to understand the work of Daron Acemoglu, Simon Johnson & James A Robinson (together 'AJR'), the winners of the 2024 Sveriges Riksbank Prize in Economic Sciences in the Memory of Alfred Nobel “for studies of how institutions are formed and affect prosperity".
Bad institutions are responsible for the coexistence of minerals endowment and the economic backwardness of states. On the other hand, good institutions have enabled states to prosper despite having lower endowments.
Simply put, the economically progressive states have been able to develop stronger institutions while the states lagging behind in economic progress in spite of the endowment of natural resources have failed to develop growth-promoting institutions.
Contradiction between mineral production and industrialisation
“Institutions as a fundamental cause of long-run growth" is a chapter in the Handbook of Economic Growth (2005), where AJR explain how institutions are responsible for economic growth. Economic institutions shape the incentives that influence investments in physical and human capital. It helps develop technology and organisation of production.
However, it may also fail to do so. To explain, they refer to the dual roles of economic institutions: Economic performance and distribution of resources. These dual roles may be conflicting as reinvestment of surplus may spur economic growth in the short run at the cost of human development.
Furthermore, different classes of people benefit from good economic performance and fair distribution. The beneficiaries of the economic performance, elites, control distribution through economic institutions, which exacerbates the conflicts.
The prime reason for this conflict is the commitment failure of political power, which fails to ensure a fair distribution due to the self-interests, although they are responsible for ensuring fairness.
AJR explained why the poor remains poor. They blame self-serving political powers that develop institutions, making institutions endogenous.
Economic institutions are developed by two types of political powers: De jure political power derived from political institutions such as parliament or assembly and de facto political power derived from resources, meaning access to money and capital. In connivance with the latter political power, the former may develop economic institutions that serve their joint interests.
The wealth generated in this process would plough in developing and maintaining the self-serving institutions, making a crony and destructive system that is difficult to dislodge. Thus, institutions remain very stable and keep serving the interests of a powerful groups instead of serving the overall public interest.
It reproduces initial wealth disparity in the future. It also explains why, despite the regional abundance of natural resources, the inhabitants of many states of India remain perpetually poor.
It is possible to overthrow an endogenous institution that fails to make fair distribution through an exogenous shock. Technology delivered the shock during the Industrial Revolution, which overthrew monarchism in Europe and ushered in mercantilism, capitalism and democracy between 16th and 18th century.
The exogenous shocks can also be delivered through collective movements. The milk strike in 1946 in the Kaira district of Gujarat overthrew the exploitative monopoly of Polson Dairy and ushered in cooperative dairy, which was later grown into a federation in 1973, popularly known as Amul.
The Bombay Milk Scheme in 1945, a classic example of a self-serving institution, made an agreement with Polson Dairy by providing them with the sole right to procure milk from the Kaira district to supply milk to Bombay made farmers economically marginalised, although it benefitted Polson. As an alternative institutional arrangement, the cooperative structure broad-based control and made more inclusive institution by making members decision-makers and eventually resolved the commitment problem.
The inability to resolve the commitment problem in the institutional system may give rise to other kinds of distortions. In the context of a lack of credibility among political powers, political clientelism may crop up.
Politicians may resort to selective transfers to a group of people to gain their political support in elections at the cost of broad-based investments in human development, such as health and education.
Although AJR’s work has been criticised due to eurocentrism and ignoring the brutality of colonial exploitation, however, their work is most pertinent given the rise of inequality and apathy of the ruling class towards uplifting masses from poverty.
Can the small transfers to households uplift them from backwardness and poverty? These transfers are definitely profitable in electoral battles, comforting for the poor but may not be enough to end endemic poverty. It would require a comprehensive institutional framework, a planned approach, to pull out people from vicious circle of poverty, which can hardly be achieved through sprinkling benefits. But that would in turn require resolving commitment problem through institutional reforms.
Broad-based public investments in human development and fixing accountability for improving health and education of masses in the long run during Amrit Kal would improve both de jure and de facto political powers of poor.
Indranil De is a professor and Axis Bank chair at the Institute of Rural Management Anand in Gujarat.
Views expressed are the author’s own and don’t necessarily reflect those of Down To Earth.