Barriers to Participation in an Economy: Monopoly, Bureaucracy and Opportunity
It is important to distinguish the notion of poverty as capability inadequacy from that of poverty as lowness of income. The two perspectives are related, since income is an important means to capabilities. Enhanced capabilities in leading a life tend, to expand a person’s ability to be more productive and earn a higher income, also improvement of a person’s capabilities lends to greater earning power.
The development of capabilities can be particularly important for the removal of income poverty. Better basic education and health care improve the quality of life directly and they also increase a person’s ability to earn an income and be free of income poverty. The more inclusive the reach of basic education and health care, the more likely it is that the poor overcome a life tied to poverty.
The importance of this connection was a crucial point of focus of the work done by Amartya Sen and Jean Dreze, dealing with economic reforms. Economic reforms have opened up economic opportunities for Indian people that were suppressed by overuse of control and by the limitations imposed on people of what had been called the “license Raj”.
The Licence Raj was an extensive system of licences, regulations and accompanying bureaucracy that were required to set up and run businesses in India. Post independence, India’s industrial policy had been shaped by the 1951 Industries Development and Regulation Act which introduced a system of industrial licensing that regulated and restricted entry of new firms and expansion of existing ones and became known as the license raj.
[The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India, Aghion P, Burgess R, Redding S, Zilibotti F. The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India. American Economic Review. 2008;94(4):1397-1412; Retrieved from: http://scholar.harvard.edu/aghion/publications/unequal-effects-liberalization-evidence-dismantling-license-raj-india]
The Licence Raj was a result of the policy decision to have a regulated economy where all aspects of the economy were controlled by the state and licences were issued to a select few. Many government agencies had to be satisfied before private companies could produce anything and production was regulated. This idea of regulation with the aim of reducing inequity and the contrast between over-regulation and varying degrees of free market economics has always had its problems.
The tensions contained in the word bureaucracy can be traced back at least 340 years, to friction between two French government officials. In 1665 King Louis XIV appointed Jean-Baptiste Colbert as his comptroller general of finance to shore up bad management and corruption in the economy. Colbert prosecuted dishonest self serving officials and reorganized commerce and industry according to economic principles in mercantilism. To assure the population that the government would act fairly in monetary disputes, he imposed a set of regulations that all officials were to abide by.
In 1751 Jean Claude Marie Vincent de Gournay became France’s administrator of commerce. Gournay was outraged by what Colbert had put in place and spoke out against the multitude of government regulations he believed were suppressing business activity. To describe a government run by insensitive creators and enforcers of rules, who neither understood nor cared about the consequences of their actions, he coined the term bureaucratie which translated directly to “government by desks.”
Hernando De Soto discusses the idea of representation by the law in his book The Mystery of Capital. One of the factors he puts forward for a successful economy and society is that people have access to the law and feel that they are represented by it. In part, he looked at the barriers that people faced in becoming a part of the active economy.
He and his colleagues, as an experiment, decided to set up a two sewing machine garment factory in a Lima shanty town, to explore access to the economy from a poor person’s experience. They used a stopwatch to measure the amount of time a typical entrepreneur in Lima would have to spend to get through the bureaucracies.
They discovered that to become legal took over three hundred days, working six hours a day. The cost involved thirty two times the monthly minimum wage. Similarly they tested what it would take for a person living in an extralegal housing settlement, whose permanence the government had already acknowledged, to acquire a legal title to a home. It took 728 bureaucratic steps
(Page 202, The Mystery of Capital, Hernando De Soto, Black Swan edition published 2001, ISBN: 0552999237]
Such barriers to trade as over-bureaucracy and as the license raj might be compared to the merchant guilds of Europe and guild socialism. Merchant guilds have often been portrayed as ‘social networks’ that generated beneficial ‘social capital’ by sustaining shared norms, being places of learning and knowledge transmission, and being a crucible for bringing together collective action.
The findings of Roberta Dessí and Sheilagh Ogilvie suggest that merchant guilds used their ‘social capital’ for socially harmful as well as beneficial ends. The merchant guilds created commercial insecurity for outsiders by undermining entrepreneurs external to their guild as they were threatening their monopolies.
They put forward that merchant guilds enabled rulers to tax trade much more efficiently and that this fiscal advantage was the basis for a collusive relationship between rulers and merchant guilds which evolved to provide substantial mutual benefits – often to the detriment of other members of society.
[Social Capital and Collusion: The Case of Merchant Guilds Roberta Dessí and Sheilagh Ogilvie Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge http://econpapers.repec.org/paper/camcamdae/0417.htm]
This exemplifies something called regulatory capture. Regulatory capture is the process by which regulatory agencies eventually come to be dominated by the very industries they were charged with regulating (George Stigler is a famous commentator). All these routes – over regulation, license raj, industry collusion – lead to the same thing; an impoverishment of the opportunities available to everyone in a society and thus take away from the human capabilities of people.
While the reforms of India were overdue, they could be much more productive if the social facilities were there to support the economic opportunities for all sections of the community. Many Asian economies –Japan, South Korea, Taiwan, Hong Kong, Singapore, post-reform China. Thailand and other countries in East Asia – have done remarkably well in spreading economic opportunities through creating an adequately supportive social background along with high levels of literacy, numeracy, basic education; good general health care; completed land reforms; and so on. The lesson of making an open economy and the importance of trade has been more easily learned in India than the rest of the lesson from the East.
India is highly diverse in terms of human development, with some regions (most notably, Kerala) having much higher levels of education, health care and land reform than others (most notably, Bihar, Uttar Pradesh, Rajasthan and Madhya Pradesh). The limitations have taken different forms in the different states.
Sen argues that Kerala might have suffered from what were (until recently) fairly anti-market policies, coming from a deep suspicion of market-based economic expansion without control. So its human resources have not been as well used in spreading economic growth as they could have been with a more complementary economic strategy, (which is now being attempted).
In contrast, some of the northern states have suffered from low levels of social development, with varying degrees of control and market-based opportunities. The need for grasping the relevance of complementarity is very important in attaining improvements.
Despite the moderate record in economic growth, Kerala has had a faster rate of reduction in income poverty than any other state in India. While some states have reduced income poverty through high economic growth (Punjab is the most notable example), Kerala has relied a great deal on expansion of basic education, health care and equitable land distribution for its success in reducing extreme poverty.
There is a danger in seeing poverty in the narrow terms of income deprivation, and then justifying investment in education, health care and so forth on the ground that they are good means to the end of reducing income poverty. This is a morally bankrupt motivation if it is the sole drive, and bound to corrupt some of the qualitative aspects of education and health welfare. Education has multiple functions in a happy, healthy society and all these things seem bound in realisation. Educating solely for a workforce has an impoverishing action on society as it prescribes that life is overwhelmingly about economics.
It so happens that the enhancement of human capabilities also tends to go with an expansion of productivities and earning power. Capability improvement helps both directly and indirectly in enriching human lives and in making peoples deprivations more rare and less acute.
This article draws from the work of Amartya Sen and aims to inform the reader of the arguments running through the book Development as Freedom surrounding education and its relation to economics and welfare. To assist people in comparing the original text, placenotes have been studded throughout this to help you reference the original source:
Development as Freedom by Amartya Sen
Oxford Paperbacks; New Ed edition (18 Jan 2001)