Dead capital

If beleaguered Planning Commission chief Montek Singh Ahluwalia is looking for justification for his decision to include experts from bodies like the World Bank on various committees, the latest World Development Report (WDR) from the Bank provides just that.

For while it is true that India’s dependence on Bank money has declined dramatically, these organisations have a wealth of international experience to share, and share for free. Consider what is in the WDR.

Some years ago, the Peruvian economist Hernando de Soto coined the phrase “dead capital” to describe the waste that took place in, primarily, Latin America due to corruption and cumbersome procedures.

If it took an entrepreneur a year to get a firm registered, this was clearly also a year of wasted profits, of fewer jobs, less taxes, and so on. The WDR has extended this to most parts of the globe, through a survey of over 30,000 firms in 53 developing countries, and the results it gets are clearly those the Planning Commission would do well to incorporate in all its studies and recommendations.

Just making sure there are no sudden blips in policy making (49 per cent FDI’s fine, but don’t promise 74 and then not do it, for instance), the WDR surveys showed, increased the probability of fresh investments by 30 per cent. More competition through an increased number of producers, the global surveys showed, resulted in a 50 per cent hike in innovations by existing players.

And a cross-sectional study across different countries shows just how serious the impact of delays in registering a firm can be— in Argentina, where it takes around 70 days to register a new firm, the hike in productivity growth was a mere 2-3 per cent compared to well over 40 per cent in Latvia, where it takes under 10 days to start a firm. In India, it takes 89 days.

Similarly, the WDR recounts the Thai experience to show that in areas where land title is made more certain (as the government of Karnataka has done through its Bhoomi project), farmers borrow anywhere much more than otherwise, and as a result their output was 14-25 per cent higher than that of untitled farmers.

In other words, the government’s failure to improve land title is contributing to increasing the quantum of “dead capital”. Since it takes 10 years to formally go bankrupt in India, compared to an average of 3.2 years across the globe, you can imagine what this does to increase the “dead capital”.

OECD experience shows when inefficient firms exit the market, productivity levels go up a fifth. Other studies cited make for equally interesting policy actions. In India, one study showed that a 10 per cent decline in import protection resulted in a 0.5 per cent hike in total factor productivity.

The interesting thing about the Bank’s WDR is that it shows how to increase growth without major policy reforms (like big bang airport privatisation or increased FDI limits) of the sort that annoy the Left parties. Yet, the Left does not want to have anything with the Bank. One of life’s ironies, that.