Suman Bery: The state we're in

Redefining the role of the state is everybody's business.

In all democracies, the boundary between the public and the private is constantly being tested. Events over the past few months provide much food for thought on where India is today, where we might want to reach, and how likely we are to get there.

My sphere of expertise is economics and these topics rightly fall within the domain of constitutional lawyers and political scientists. As against this, the field of development economics is increasingly taken up with examining the political origins of reform (and of the economic origins of democracy) as well as the role of institutions, predictability, property rights and service delivery (all loosely termed governance) in determining economic growth.

The events in question have been coming thick and fast. On the more dispiriting side, they include the politics- feeding frenzy on reservations in higher education and its sequel, the sacking (and temporary restitution) of the director of the All-India Institute of Medical Sciences (AIIMS) by the Board. They also include the recent reversal on privatisation, and the embarrassing repeated travails of Mumbai in the monsoon. Cumulatively, these and other episodes are being forged by the media into a narrative of state failure and political overreaching. Despite its own many infirmities, only the judicial system emerges with any credit, with the other two great organs of the state, the legislature and the executive, in seeming decay.

That these issues are restricted to India is evident in the title of this month's column, which is taken from a book by Will Hutton. The book provides a (left-wing) critique of Blairite and Thatcherite Britain and recommends deep-seated political and economic reform. Nor are citizens in France, Italy, or the United States particularly satisfied by the current state of their democracy. So a certain degree of restlessness is normal, even desirable.

Yet, as recent columns by Shekhar Gupta in the Indian Express and by

T N Ninan in this paper have noted, there are significant shifts taking place in the economic interactions between the political and corporate spheres. In his column of June 24, Gupta points out, with his characteristic enthusiasm, the unexpected alliances currently on display: Manmohan Singh and Anil Ambani; Buddhadeb Bhattacharjee and Mukesh Ambani (not to mention Ratan Tata); perhaps less unexpectedly, Navin Patnaik with Posco and now Lakshmi Mittal.

More cautiously, Ninan, in his piece of June 24, observes that fiscal mismanagement has been partly responsible for, as he puts it, converting India "from the politician's socialist dream into a capitalist's delight" as the private sector roars into telecom, airlines, airport management, banking, hotels, power distribution, and township development. But as he correctly notes (and as the experience, for example, of post-Soviet Russia exemplifies), such delegation of core assets to the private sector carries burdens and risks as well as benefits.

There is a crucial line between a "positive investment climate" and "crony capitalism", a line that depends on transparency and what economists call "contestability": the capacity of new entrants to mount an effective challenge. So the issue becomes one of providing political and social legitimacy to this renewed role for the private sector (renewed because this was the role played by the private sector before the era of planned development and electoral democracy). In these pages Deepak Lal has pointed to some of the risks posed by public-private partnerships, widely resorted to as more politically acceptable than privatisation. Surjit Bhalla has also written at length on what in the US is called the "social pork barrel": social programmes whose primary political motivation is patronage and leakage.

Each society develops its own mechanisms for managing these conflicts and developing the necessary legitimacy for private wealth, particularly, as is often the case, if this wealth stems from some socially sanctioned rent. In aristocratic societies, traditional wealth was from the land, and was legitimised through the conventions of "noblesse oblige": the obligations of the wealthy. In the United States, wealth has been legitimised and managed through the combination of anti-trust enforcement, strong and honest tax administration, open and efficient financial markets, widespread access to education and, as we have seen spectacularly in recent days, philanthropy.

In modern Europe, the social compact seems to tolerate inequality of wealth if not income, in exchange for high income taxation, relatively low income inequality and a strong social safety net. According to a survey of philanthropy in The Economist earlier this year, these differences in culture show up clearly in different standards of giving. In the US, philanthropic giving is beginning to approach 2 per cent of GDP, while in France, Japan, Germany, and Italy it is less than a quarter of this.

I do not for one minute mean to argue that the private sector should or can displace the state in all activities; nor do I suggest that philanthropy is a necessary or sufficient offset for an expanded private sector role. My point is rather that the redefinition of the role of the state currently under way is a profoundly important political development, which carries much opportunity but some risk. My concern is that, given their short-term compulsions, our major political parties are doing a woefully inadequate job in preparing the public for this major realignment of roles.

My conclusion is that more of the burden of both action and communication will have to be taken up by non-state actors. Here, the major responsibility lies with the private business sector itself. Philanthropy, corporate social responsibility, and codes of conduct are a start, but I would argue that the effort needs to go further.

An enlightened corporate sector should see that a more competitive environment would not only strengthen it, but would give its activities (and the ensuing private wealth) much greater social acceptability. This would require a greater embrace of reduced tariff and investment barriers, support for an effective domestic competition regime, and of effective regulators. Apart from the corporate sector (and the judiciary), others in civil society also have critical roles to play in defining the boundaries of the state as we have seen in recent episodes involving the Knowledge Commission, the Institutes of Management, and AIIMS.

There are some societies where the structure and compulsions of distributive domestic politics make sustained growth difficult, if not impossible. Certainly, economic development is not an assured right for any poor country. By choking off competition and entry, close ties between industry and politics can as often lead to stagnation as to growth. To take a title from another book, capitalism often needs to be saved from capitalists""and from politicians. Doing so in a democracy is everybody's work.

The author is Director-General, National Council of Applied Economic Research. The views expressed here are personal.

sbery@ncaer.org