Friday, October 4, 2013

Liberalise legal system for transforming India

Liberalise the legal system for transforming India

By Atanu Dey on October 3, 2013

Liberalise the legal system for transforming IndiaFor modern India, economic prosperity has been an elusive goal. For too long, Indians have suffered deprivation while much of the world has progressed far ahead in material wellbeing. India has the potential to also be materially prosperous but it is not. What stops it and what can be done to remove the barriers are questions that we must understand before India is transformed and reaches its potential. India's transformation depends on the transformation of our thinking about the economy.

Stripped of all details, an economy is essentially a collection of people engaged in three broad activities: production, consumption and exchange. All three activities necessitate voluntary cooperation among people. Production necessarily precedes consumption. Consumption is bounded by production since more cannot be consumed than is produced. Therefore increasing consumption requires increasing production.

Production and exchange of most goods and services in a complex modern economy involves cooperation among many people. However since most people are nearly always motivated by self-interest, opportunistic behaviour by some is inevitable. People sometimes cheat, misrepresent, don't meet their obligations, and generally behave anti-socially. This interferes with production and exchange reaching its full potential.

Most of the time, people are good in the sense that they don't harm others through their actions or their inactions. But when they do cause unmotivated harm to others, there has to be an institutional mechanism to fix the problem. This institution is called the legal system and one of its important tasks is to protect people from other people as they all go around doing their business of producing, consuming and exchanging.

Exchange takes place in the market. In markets, people buy and sell. This requires contracts and well-defined property rights. Enforcement of contracts is an absolutely essential job of the legal system. If contracts cannot be enforced efficiently and quickly, many welfare improving trades do not take place and production suffers.

The importance of dispute resolution and enforcement of contracts cannot be overstated in a modern economy. To a very large extent, India's economic failures can be traced to an inefficient and ineffective legal apparatus in this regard. There are over 30 million cases pending in the Indian courts. The Supreme Court of India has over 66,500 cases pending, according to a recent report. Property quarrels drag on in the courts for decades and in some cases, litigations continue for several generations. Assets that could have been productive lie unused because of such disputes.

One of the reasons for the huge number of cases is that India has too many laws, many of them arcane and meaningless. I believe that one of the primary causes of too many laws is that the government interferes too much in the affairs of people, which is a colonial legacy. The colonial government created laws for its own benefit and those in control of independent India did not find it in their interest to change these. Though the country gained political freedom from a foreign power, Indians continued to be oppressed by the government, albeit a government democratically elected by the people, through those old laws.

Among the most important changes needed for India's transformation relates to fixing the legal system. The many thousands of laws that presently hinder economic activity must be rationalised and reduced so that cases can be resolved efficiently and quickly. This is a hard problem to solve because those who gain from the current dysfunctional system are precisely those who can change the system. It is not in their interest to make the needed change.

An intrusive government which interferes in all aspects of economic activity – production, consumption and exchange – gives those in positions of authority to extract rents from the economy. In a command-control-license-permit-quota system – also known as a socialist economy – politicians and bureaucrats wield enormous power to deny or allow economic activity. The power to prevent voluntary trade affords the opportunity for public corruption.

Although this system is hard to change, it is not impossible. What India needs is leadership that is committed to change this system. The primary requirement is therefore leaders how don't have a vested interest in the continuation of the old system and who have the required vision and the wisdom to understand the importance of changing the legal system. Admittedly this is a tall order but it is an indispensible order. Since India elects its leaders democratically, the wisdom and vision of India's leaders is a function of how much wisdom and vision Indian citizens have. We may be able to import many things from abroad but insight and vision will have to be home grown. That's a scary thought but also a liberating one because we don't have to depend on others for our salvation.


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