22 May 2016

Five Conditions for Free Enterprises

Professor Raghuram Rajan, the Governor of Reserve Bank of India, delivered the fourth Odisha Knowledge Hub Lecture at the Secretariat Conference Hall, Bhubaneswar on 21 May 2016. His talk was titled in a generic sense India - Prospects and Challenges. The focus of the lecture was on facilitating free enterprise (particularly, the small and medium ones). Governor Rajan laid out the need for five conditions.
  • Ease of entry and exit
  • Access to input and output markets
  • Predictability in earnings (security of property rights and transparency guarantees)
  • Facilities to enhance capabilities and competencies
  • Safety-nets to safeguard against vulnerability for the entrepreneur as also the worker (bankruptcy, old age, sickness, social exclusion and unemployment among others)

Rajan's concern for the small seems to find resonance in some of his earlier work including A Hundred Small Steps. I appreciate this take. Nevertheless, I have the following concerns.

First, facilitating small enterprises and allowing them to grow is necessary to induce growth. While agreeing to this requirement, I would like to point out that in a logical sense this can be a catch-22 scenario. In other words, if one extends this argument ad infinitum, which many do, then it would mean that few big players (who might have started small) end up dominating the economy. This is somewhat paradoxical because the argument has been used to create a level playing field for the small players. There is nothing wrong in becoming big and one should appreciate their achievement. But then these entities have created a space for themselves and they do not need any additional support. Besides, we should also guard against the possibility where entities become too big to fail.

Second, Governor Rajan's suggestion that norms and institutions that have become dated and out of context and impede progress need to be done away will pave the path where informal entities become formal entities. In other words, the state should create an environment where business entities have more to gain in being a formal entity than in continuing to remain informal that facilitates rent-seeking behaviour. This will be a good thing for the economy and will also add to the state's revenue. The problem with this articulation is an excessive concern on the economic entity. It misses out the fact that when it comes to employment, more than 90 per cent of the workers are informal workers and this informalisation of the workforce is increasing even in entities that are themselves formal (both in the private and public sectors including the government). The state of the informal workers and their rights to organise themselves, to do away with forced labour (not only in the form of slavery but also its manifestation in modern forms), to do away with exploitation of children (including trafficking), and to avoid discrimination (not only in wages, but also in opportunities).

Third, Professor Rajan's emphasis on enhancing capabilities and provisioning for safety-nets may give the impression that it resonates with what Professor Amartya Sen et al have been articulating. But, this is not the case. Governor Rajan's concerns is more for the enterprises. The concern for individuals emanate from the fact that they are instrumental in facilitating the enterprises. In the Amartya Sen et al human development and capability framework it is intrinsic to focus on enhancing capabilities and provision for safety nets because humans are ends in themselves. 

From a lay perspective, it would seem irrelevant whether the focus on human ends is because they are instrumental in facilitating something else; or, it is intrinsic to facilitate their beings and in doing that their instrumental advantages will automatically emerge. However, from an academic perspective, the focus on the enterprises, as in Governor Rajan's talk, may have an excessive reliance on a money-metric measure, as a proxy for the Utilitarian notion of happiness; while the focus on ends (may go beyond humans) could have multiple perspectives, a reasonably plural Rawlsian world.

A fourth concern, independent from Professor Rajan's talk, is that the Government of Odisha should look at some of the success stories from East Asian economies (particularly Taiwan and Japan; see the video and presentation slides of a talk on Rising India that refers to lessons from Taiwan). They have some lessons in facilitating free enterprises for the micro and small entities.

Despite these concerns, the suggestions by Governor Rajan are worthwhile. It would help the Government of Odisha or for that matter any other state government as also the central government to address some of the concerns raised in articulating a case for facilitating free enterprises through the above-mentioned five conditions, but where the intrinsic relevance of the people-centric aspects is acknowledged.


  1. I am just wondering is there any research that says why Odisha is poor?


  2. I think your second concern is not a concern. Rajan knows very well that 90% of the employment comes from informal sector. This is why he is calling for graduation from informal to formal by doing away with rules that inhibit this transition. Why do India have SMEs (in fact, around 70% of firms are in this category) and few large firms? Why do firms choose to stay informal. The moment they hire more than 100 labors they will be considered as a Census unit and will be subjected to some hundred rules, inspection and all. I think Rajan is saying we need to remove thses unwarranted and outdated rules. This will benefit employees as they would get social security benefits, higher pay, more bargaining power.


  3. Santosh: Thank you for your comments. The second point is an additional concern because when enterprises become formal it is not necessary that their employees/workers become formal. This has been articulated by the National Commission for Enterprises in the Unorganized Sector (http://nceuis.nic.in/). It is also a matter of rights, as per the UN/ILO conventions that India is a signatory, that do not get automatically satisfied with enterprises becoming formal. On Odisha's you may go through a recent edited book by Pulin B Nayak, Santosh Panda and Prasanta Pattanaik titled The Economy of Odisha: A Profile, by OUP. If you read Odia then you could look up an old book by Bijay Bahidar (perhaps co-authored) and the title is Odisha Daridra Kahinki (Why is Odisha poor).

  4. Thank you for your replay, Sir. Yes, i do read Odia. If i get time, i will do look at the books you have mentioned. However, i am kind of looking at a detailed investigation of why Odisha is poor? Out of many theories like geography and resource curse hypothesis (Jeffery Sachs), (poor) institutions hypothesis (Acemeglou and Robinson) etc which accounts for Odisha's poverty. When i think of Odisha it reminds me of Bob Lucas's famous quote ".....Is there some action a government of India could
    take that would lead the Indian economy to grow like Indonesia's I)r Egypt's?
    If so, what, exactly? If not, what is it about the' nature of India' that makes it
    so? The consequences for human welfare involved in questions like these are
    simply staggering: Once one starts to think about them, it is hard to think
    about anything else." What is bothering me that despite 17 (20 when Naveen complete this term) years of political stability Odisha's industry could not accelerate, we are still in the bottom of table in all socio-economic indicators. I thot Political stability is a necessary condition for growth or atmosphere for growth. But Mr, Patnaik proved it wrong. He showed it is a double-edged sword and that it can be counter-productive.
    What is matter of grave concern is gross under-staffing in two inputs, namely education and health - two key drivers of growth. The fact is that when Odisha is having surplus budget since 2005-06, why are we still clinging on to fiscal reforms forced on us by the World Bank? What is bothering me is why are Odia's (tho I am an Odia) not protesting?

    What is your thoughts on Why Odisha is poor?


  5. To add, if you can reflect on these questions it would be good?

    1. What Odisha can do to increase its percapita income, or braodly higher welfare? Where is the solution?
    2. Why is industrial sector not growing? Do we have a good atmosphere that promotes enterprises?

    Thank you.


  6. Sntosh: Thank you for your concern for Odisha. Do read the recently published OUP book. It will not answer all your questions, but will give a perspective. And, as of date, the best book on Odisha's Economy.