4. OUTLINE
• What are Institutions?
• Which Institutions matter?
• Public Institutions as Institutions of
Governance
5. OUTLINE
• What are Institutions?
• Which Institutions matter?
• Public Institutions as Institutions of
Governance
• Where does India stand on its core
institutions of governance?
6. What are Institutions?
• “The rules of the game in a society”
Or more formally
“the humanly devised constraints that
shape human interaction.”
Douglas North
7. What are Institutions?
Institutions are a set of humanly devised
rules that govern and shape the
interactions of human beings, in part by
helping them to form expectations of what
other people will do.
Douglas North
8. Why are Institutions important?
• Institutions shape:
- rules of the game (formal)
- norms/conventions (informal)
9. Why are Institutions important?
• Institutions shape:
- rules of the game (formal)
- norms/conventions (informal)
• By affecting
- incentives
- and transaction costs
(costs of specifying what is being exchanged and contract enforcement)
10. INSTITUTIONS AS
HISTORICAL LEGACY
• “Property Rights” Institutions
– Private property; Inheritance rights…
• “Contracting” Institutions
– Legal systems (Common law vs Civil law)
• “Extractive” Institutions
– Forced labor institutions such as slavery, serfdom,
caste (jajmani)
11. Market-supporting Institutions
• Property Rights
• Regulatory Institutions
• Institutions for Macro-stabilization
• Social Insurance Institutions
• Institutions of Conflict Management
12. Institutional Design
• Macro-stabilization Institutions
– e.g. central banks (RBI)
• Entity that spends money (executive
branch) should not be the one that prints
money
• Design of central banks is an example of
separation of powers, a hand-tying
strategy to limit political temptations
13. Political Institutions
• How Critical is Regime Type?
– i.e. democracy vs authoritarian
• The most developed countries are largely
Liberal Democracies. Does that mean that
this is the “ideal” political regime for
development outcomes?
15. If Liberal Democracy is indeed ideal…
• How has China managed to sustain 37 years of
historically unprecedented rapid growth (and
poverty reduction) under repressive political
conditions?
• Why has India not reaped a greater “democracy
dividend”?
• Or do means matter as much as ends?
17. • Traditions and institutions by which
authority in a country is exercised. This
includes:
– processes by which governments are
selected, monitored, replaced
– the capacity of the government to effectively
formulate and implement policies
– the authority exercised on citizens by the
institutions that govern economic and social
interactions
What is Governance?
18. • Six broad dimensions of governance for
over 200 countries and territories over the
period 1996-2015
Voice and Accountability
Political Stability and Absence of Violence
Government Effectiveness
Regulatory Quality
Rule of Law
Control of Corruption
Worldwide Governance Indicators
19. • Voice and accountability captures perceptions
of the extent to which a country's citizens are
able to participate in selecting their
government, as well as freedom of expression,
freedom of association, and a free media
• Select questions that capture this measure are:
– Are electoral processes flawed?
– Is there freedom of assembly?
– How much do you trust the parliament?
– How satisfied are you with the way democracy
works in your country?
Measure 1: Voice and Accountability
20. The inner blue line shows India’s percentile rank; the outer
orange lines indicate margins of error
Over the time period of 1996-2015, this measure has stayed
stable with a percentile rank between 58 and 61.
21. Voice and Accountability across countries
In 2015, India had a higher percentile rank (61) as
compared to the South Asian average (35) and its
neighbors Pakistan (27), China (5) and Bangladesh (31)
22. Institutional Mechanisms of Voice
and Accountability in India
• Elections (ECI)
• Supreme Court, CAG, CVC, CBI
• Lokayukt
• Democracy: Civil Society
• Media
– Press freedom ranking: 136/180 countries
– Lower than Bhutan and Nepal
23. Measure 2: Political Stability & Absence of Violence
• This measures perceptions of the likelihood of
political instability and politically-motivated violence,
including terrorism. A low score indicates that the risk
of political instability is very high
• The measure captures data on information such as:
– Instances of armed conflict, violent demonstrations,
social unrest
– Intensity of social conflict: ethnic, religious, regional
– Protests and riots that cause damage to assets or
injure or detain people
– Terrorism, interstate war, civil war
24. India scores low on this measure with fluctuations over time. Its 2015
percentile rank is 17; Highest percentile ranking (19) in 1996; lowest
points at rank 8 (in 2003) and rank 10 (in 2009)
Violence
25. With a percentile rank of 17, India fares only slightly better
than Bangladesh (11), but worse than China (27). The South
Asian average (30) and lower middle income country average
(39) are higher than India’s percentile rank on this measure
Political Stability Across Countries
26. Violence in India
• Crime per lakh persons increased by 28% from 2005 to
2015 but…
• Convictions low. In 2015, convictions were secured in
47% of the cases registered under the IPC.
• Insurgency related violence (J&K, NE, Maoists)
• Riots, bandhs, andolan and mob violence more generally
• Public perception of insecurity (especially women)
• Biggest increase in central government employment is
central police forces – by 37% from 2006-2016
27. • Captures perceptions of the quality of public
service, quality of civil service, independence
from political pressures, quality of policy
formulation & implementation
• Some measures of this concept are:
– Satisfaction of people with public services
– Likelihood of disruption of infrastructure
– People’s trust in public administration
Measure 3: Government Effectiveness
28. India’s government effectiveness currently stands above average at 56 percentile;
highest in 2007 (rank 57); low in 2014 where it fell below average to rank 45
29. India’s percentile rank of 56 in 2015 is lower than that of
China’s (68); higher than the South Asian average of 36
Government Effectiveness Across Countries
30. The Puzzle of Government Effectiveness
• “State capacity” in India varies greatly, successfully managing
complex tasks:
- Conduct elections for 800 million + voters
- Send a mission to Mars, 100+ satellites in one mission
- Conduct census’s for 1.2 billion + people
- Organize the largest temporary city in the world during the Kumbh
Mela….
• ….but failing in relatively simple ones:
- primary education
- public health
- water & sanitation
• While it is politically effective in managing one of the world’s largest
armed forces…
• …it is ineffective in managing public service bureaucracies
31. 31
State has been successful to some degree
Considerable improvements in socio-economic indicators
~1950 2015
Literacy
(% of population)
18 78
Life expectancy
(Years)
32 68.3
Maternal
Mortality (per
100,000)
1321 174
Per Capita
Income
($ per year)
150 1750
32. But India still has a long way to go...
International Comparators
32
Indicator Ranking Value World Average
HDI (2014) 130/188 0.609 0.711
Per Capita Income
(PPP) (2015)
152/216 $6,030 $15,655
Ease of Doing
Business (2015)
130/190 - -
Corruption
Perception (2016)
8
79/176
40 43.2
Press Freedom
(2015)
133/180 43.17 33.46
33. • Captures perceptions of the ability of
government to formulate and implement policies
that promote private sector development
• Some measures are:
– Unfair competitive practices, price control,
discriminatory tariffs
– Ease of starting a business governed by local law
– How labor and tax regulations affect business
– Ease of foreign firm entry and freedom of
investment
– Regulatory burden, tax inconsistencies
Measure 4: Regulatory Quality
34. In 1996, this measure was at its lowest of rank 32; since then it has
increased, reaching a high point of 47 in 2005; however it dropped after
that
35. India is below average on this measure (percentile rank: 40)
similar to China (44); Western democracies ranked above 80
Regulatory Quality Across Countries
36. The Regulatory State in India
• Agricultural and Processed Food Products Export
Development Authority
• Airports Authority of India
• Airports Economic Regulatory Authority of India
• Atomic Energy Regulatory Board
• Central Drugs Standard Control Organization*
• Central Electricity Regulatory Commission*
• Central Pollution Control Board*
• Coal Regulatory Authority
• Coastal Aquaculture Authority
• Competition Commission of India
• Director General of Civil Aviation
• Director General of Hydrocarbons
37. The Regulatory State in India
• Food Safety and Standards Authority of India*
• Forward Markets Commission
• Inland Waterways Authority of India
• Insurance Regulatory and Development Authority
• National Disaster Management Authority*
• National Pharmaceutical Pricing Authority
• Office of Controller of Certifying Authorities
• Pension Fund Regulatory and Development Authority
• Petroleum and Natural Gas Regulatory Board
• Reserve Bank of India
• Securities & Exchange Board of India
• Tariff Authority for Major Ports
• Telecom Regulatory Authority of India
38. Regulatory Tribunals
• Appellate Tribunal for Electricity
• Appellate Tribunal for Foreign Exchange
• Authority for Advance Rulings
• Board for Industrial and Financial Reconstruction
• Company Law Board
• Copyright Board
• Customs Excise and Service Tax Appellate Tribunal
• Cyber Appellate Tribunal
• Debt Recovery Appellate Tribunals and Tribunals
• Film Certification Appellate Tribunal
• Income Tax Appellate Tribunals
• Intellectual Property Appellate Board
• National Company Law Tribunal and National Company Law Appellate Tribunal
• National Green Tribunal
• Securities Appellate Tribunal
• The Competition Appellate Tribunal
• The Telecom Disputes Settlement and Appellate Tribunal
39. • Captures perceptions of the extent to which agents
abide by rules of society; also captures quality of
enforcement, property rights, police, courts,
likelihood of crime and violence
• It is measured in the following ways:
– Speediness, fairness, and independence of judicial
process
– Reliability of police and enforcement of court
decisions
– Citizen surveys: have you have feared crime in your
own house or have been physically attacked?
– Whether the state exercises arbitrary pressure on
private property
Measure 5: Rule of Law
40. India’s highest percentile rank on this measure was 59
in 1996; lowest of 51 in 2002; currently ranked 55.
41. India’s percentile ranking (56) better lower middle-income
country average: also better than China (44)
Rule of Law Across Countries
48. One of smallest police forces per capita
• United Nations recommended standard
– 222 police per lakh persons
• India’s sanctioned strength
– 181 police per lakh persons
• Actual police strength in India
– 137 police per lakh persons
49. Shortage of Officers in the
Armed Forces
Year Army Navy Air Force
2012 10100 2054 573
2013 9590 1748 635
2014 8455 1540 394
2015 9642*
(As on 1.1.2015)
1322
(As on 31.1.2015)
152
(As on 2.2.2015)
49
Source: PIB, Release ID :117200, March 17, 2015
51. • Captures the extent to which public power is
exercised for private gain; includes petty and
grand forms of corruption, and capture of the
state by elites and private interests
• Representative sources of measurement:
– Whether people think corruption in the govt. is
widespread
– Whether there is accountability and transparency in
the public sector
– Whether corruption is problematic for the growth of
business
– Unofficial payments to public officials as bribes
Measure 6: Control of Corruption
52. India is currently ranked at 44 percentile and has been seeing a steady
rise since 2011; Highest rank 2006 (47); worst in 2002 (38)
53. India is ranked below average on this measure (44), close to
the South Asian average of 38; China ranks better (50)
Control of Corruption Across Countries
56. Institutions matter, but..?
• What are the relevant institutions for successful
development?
• Is there one "first-best" set of institutions, or is
the optimality of institutional systems country-
specific?
57. Institutions matter, but..?
• What are the relevant institutions for successful
development?
• Is there one "first-best" set of institutions, or is
the optimality of institutional systems country-
specific?
• To what extent can "optimal institutions" be
imported?
58. Institutions matter, but..?
• What are the relevant institutions for successful
development?
• Is there one "first-best" set of institutions, or is
the optimality of institutional systems country-
specific?
• To what extent can "optimal institutions" be
imported?
• How does institutional change occur?
59. Institutions matter, but..?
• What are the relevant institutions for successful
development?
• Is there one "first-best" set of institutions, or is
the optimality of institutional systems country-
specific?
• To what extent can "optimal institutions" be
imported?
• How does institutional change occur?
• How can a country improve its institutions?
61. Institutional Change
• Institutional Change: Endogenous or Exogenous?
• Endogenous:
– Leadership
• Exogenous
– Natural Disasters, Wars
• How does technology and technological change
affect this relationship?
62. • A research dataset summarizing the views
on the quality of governance
• Initiated by researchers at the World Bank
and Brookings Institution in 1999
• Provided by a large number of enterprise,
citizen and expert survey respondents in
industrial and developing countries
• Allows for broad cross-country
comparisons and for evaluating broad
trends over time
Worldwide Governance
Indicators (1)
63. • Four different types of source data:
– Surveys of households and firms, including the
Gallup World Poll and Afrobarometer surveys
– Commercial business information
providers, including the Economist Intelligence
Unit, Political Risk Services
– Non-governmental organizations, including
Global Integrity, Freedom House, Reporters
Without Borders
– Public sector organizations, including the CPIA
assessments of World Bank, the EBRD
Transition Report, French Ministry of Finance
Data Sources
64. • Aggregation methodology
– STEP 1: Data is assigned from individual
sources to the six aggregate indicators
– STEP 2: Individual source data is rescaled
to run from 0 to 1
– STEP 3: A statistical tool known as an
Unobserved Components Model is used to
make the 0-1 rescaled data comparable
across sources
– STEP 4: a weighted average of the data is
constructed from each source for each
country
Methodology – Brief Review
65. • The six aggregate indicators are reported
in two ways:
– In standard normal units of ranging from -2.5
to 2.5 (with mean 0)
– In percentile rank terms ranging from 0 to 100
– In both cases, higher values correspond to
better governance and better outcomes
Reporting the data
66. Why Nations Fail
Acemoglu and Robinson
• Political Institutions determine Economic Institutions
• Two types of Political Institutions:
• Extractive catering to elites
• Inclusive that are more broad based
• Constraints on Executive
• Protection of Property Rights (expropriation
risk)
• Countries with inclusive, broad-based institutions
have higher growth rates
67. Question
• Which way does causality run? Does
growth lead to better institutions or do
better institutions lead to growth?
– E.g. Italy, Germany, Finland?
– Japan, South Korea, Taiwan, Hong Kong and
Singapore