Institutional successes of the modern world

What are the great institutional successes of the modern world? Democracy, rule of law, fiscal policy and monetary policy. How do we know these have been successes? Rules or constraints at the level of the state have been followed by individuals to co-ordinate on an equilibrium such that there is little uncertainty and more opportunities for growth. There is greater power for the individual in a constrained political framework where the executive has constraints on the power and repression. Where the individuals can compete to become leaders and have information about the political parties which compete in an open and transparent manner. These measures are hallmarks of a state that does not have to tinker with exogenous rules to maintain growth. The changes to rules come from within. However, these are examples of political institutions. There can be institutions that work to promote law and order, to collect taxes and to affect the efficiency and equity of the banking system. What I would like to talk more about are the institutions governing the expenditure of taxes. These can in the extreme case go to the leader’s pocket if there are no restrictions – either constitutional (in terms of getting re-elected) or de facto power that the leader exerts by virtue of the weakness of other institutions – such as that of independence of judiciary or media. This is the case in many African countries (like Zimbabwe). How do these institutions change to bring about better targeting of expenditures. To reduce poverty, to improve the quality of life and to bring peace and prosperity into the lives of the national population. Does change come from external sources like conditional aid? Does it come from within – through revolutions and coups? Does it come with time naturally?

Now take a developing country with fairly strong democratic traditions (like India). Here, how should expenditures be targeted. Of course, health and education would take precedence. Within health, how should health workers be compensated? How much to spend on new equipment? How much should be spent on building more hospitals and improving access? These are institutions that are again linked to other political and economic institutions (for example, democracy and how effective the tax system is or if law and order is a problem). There can be failures at this level of institutions if the targeting of expenditures does not have a desired impact. These failures can be sustained if there is a lack of knowledge on the demand side (for example, the population) or even if there is no lack of knowledge – there could be problems of collective action. On the other hand, there could be a supply-side problem too. Here, the workers may not be motivated enough by what the government is paying them and they end up demotivated and reduce their quantity and quality of effort. Successful fixing of such institutions can then mean making workers motivated and improving knowledge among the beneficiaries or by solving collective action through community-based interventions. An example of solving both demand-side and supply-side problems is the microfinance model a la Grameen Bank. Here supply-side problems of adverse selection and moral hazard that lead to high non-performing assets are solved by group credit (social capital is the collateral) and also promising more credit if the loan is repaid. The demand-side problem of inadequate information (about saving, financial instruments, investment opportunities) as well as self-control issues are addressed through regular meetings with stakeholders. Another example could be paying performance pay to child health workers and at the same time educating mothers about health and nutrition. If only performance pay is offered to workers and they improve their inputs, there could be an endogenous feedback such that mothers may reduce their feeding to the children. Similarly, workers may reduce their efforts if mothers increase the inputs at home. Incentivizing workers and mothers to improve their inputs would fix both types of market failures simultaneously and help sustain an institutional equilibrium that improves lives of both health workers and beneficiaries without any negative spillover effects on political and economic institutions.

Will-power: the way to development? (published, NH Magazine, London)

Religious paradigms almost always involve the concept of self-control. The willingness to give up today for a better tomorrow. That “denying oneself” temporal pleasures leads us to appreciate the timeless virtues. But what does science tell us about self-control? 

Psychologists believe that a person’s willpower can be measured through observation. This can involve recording how people behave in a laboratory setting. For example, a recent experiment involved people getting the choice of radishes and choco-chip cookies after they were forced to skip a meal. Those who were able to exert willpower to avoid the choco-chip cookies were able to exercise greater self-control in other areas of life too. Another experiment in economics involved children who were asked to resist the temptation of candy to get more candies. Those who were able to restrain were also more likely to be richer adults.  Psychologists have shown that one way to improve one’s willpower “muscles” is to have more glucose, as a brain short on glucose and sugar is likely to be fatigued and so more prone to take irrational decisions. In other words, to exercise candy control, one may need more candies.

The exercise of restraint can differ according to person, time, object and environment. People easily give in to temptation in certain dimensions and not in others, such as addiction-forming habits like drinking, smoking or drugs. Moreover, these can change over time and space. Often, these habits will have spillover effects on the surroundings. Thus, even a libertarian might argue that government intervention is necessary because individuals may harm each other by not taking into account the result of their actions. Several governments have banned smoking in public places. This has the upside of not only avoiding passive smoking but also strengthens the average person’s willpower who otherwise might have become addicted to smoking.

Thus, willpower is like an axe. It can get sharpened through activities like meditation and imposition of self-discipline (learning) but it can also get blunt through mundane activities when self-control is lacking (fatigue). Recent economic studies also find that increasing mental fatigue in a poor person’s life when he has to make several mundane choices may in turn lead to an (irrational) lower investment in human capital. In one of my field experiments on child malnutrition, I correlate how much “junk food” a young child eats and the mother’s self-control as measured by her proclivity to save for the future. Although, this work is in progress, I expect that the mother will “give in” more easily to a child’s demands if she also likes to buy other items (like a TV) now rather than later all other things remaining same, for instance the average income of the family, location and education.

What determines a person’s willpower? Is it inborn or can it be acquired? These questions are still at the frontier of research, but it appears that those who are religiously and spiritually inclined show higher levels of willpower.  Just as countries grow faster in the long run with greater investment into education, machinery and technology, we may show quicker personal growth if we learn to be more spiritual. The paradox here is that to be more spiritual, one needs to have more self-control. Spirituality and self-control feed off each other and this prompts the question as to what may be driving both spirituality and self-control? They can come through building of institutions. Where the families enforce discipline and at the same time allow inner growth. Where there is selection: you do not want even one bad apple to spoil the rest. Where there is punishment for sinning and incentive for being disciplined. Where there is more stick for vices that are addictive and have greater spillovers. Where there are more carrots for giving up choco-chip cookies. Where these rules are clear to everyone from an early stage. Where there is a sense of community such that everyone can monitor each other. Only then, can we move towards a utopian world.

Yet again, the paradox is that in order to build such institutions, one needs enormous willpower.