Tuesday, February 08, 2005

India: A reality lesson in institutions

The Globalist features an adaptation from Sukehu Mehta's Maximum City that is quite revealing about institutions in India. In particular, this is quite revealing if we think of institutions as Avner Greif has defined them. In other words, what Mehta writes is revealing when we think of institutions in the context of an approach that:
...emphasizes the importance of social variables: (non-physical) factors influencing behavior that are social in being man-made, yet are exogenous to each individual whose behavior they influence. Among these social variables are shared beliefs, expectations, and internalized norms, cognitive systems, socially articulated and distributed rules, and informal and formal social structures (organizations)...an institution is defined, roughly speaking, as a system of social variables (institutional elements) which conjointly generate a regularity of behavior.
This really came to mind when I read what Mehta writes. The social customs in India are complex and, to the outsider, very difficult to understand. These same social customs have very important implications for economic efficiency and productivity. Take this bit, for example:

We learn the caste system of the servants: the live-in maid won't clean the floors — that is for the "free servant" to do. Neither of them will do the bathrooms, which are the exclusive domain of a bhangi, who does nothing else.

The driver won't wash the car — that is the monopoly of the building watchman. The flat ends up swarming with servants. We wake up at six every morning to garbage, when the garbage lady comes to collect the previous day's refuse...

...Most people who can afford it have two lines, because one is always going out. Then the phone department has to be called and the workmen bribed to repair it. It is in their interest to have a lousy phone system.

As a result, in the "Country of the No" nothing is fixed the first time around. You don't just call a repairman — you begin a relationship with him.

And how do institutions affect economic outcomes? Here is one way:

"Can I rent a flat at a price I can afford?" Coming from New York, I find that I am a pauper in Bombay.

The going rate for a nice two-bedroom apartment in the part of South Bombay where I grew up is $3,000 a month, plus $200,000 as a deposit — interest-free and returnable in rupees. This is after the real estate prices have fallen by 40%.

Why is real estate so expensive? Well, it's because the supply of land titles that can remotely be considered solid is minimal.


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